Bernanke: Keep Fed As Watchdog of Small US Banks

Saturday, 20 Mar 2010 10:44 AM

Federal Reserve Chairman Ben Bernanke made a fresh pitch Saturday to retain oversight of small banks, contending that what the Fed learns from that role helps it assess the overall health of the entire U.S. financial system.

Bernanke, in a speech to the Independent Community Bankers of America's meeting in Orlando, Fla., argued against a Senate proposal that would scale back the Fed's banking duties.

Close connections with community banks give the Fed a better understanding of the nation's financial risks, including problems in commercial real-estate and small-business lending, according to Bernanke's prepared remarks.

A Senate bill to overhaul financial regulation would strip the Fed of its power to supervise state-chartered banks and bank holding companies with assets of less than $50 billion. That would leave the Fed overseeing only 35 big bank holding companies. The legislation, written by Sen. Christopher Dodd, D-Conn., is set to be debated on Monday by the Senate Banking, Housing and Urban Affairs, which he leads.

Critics have blamed lax regulation at the Fed and at other agencies for contributing to the financial crisis.

Financial instability can undermine small banks, not just big ones, Bernanke said. Small banks contributed to the problems of the Great Depression, he noted.

Small banks have expressed support for continued regulation by the Fed and have made arguments similar to Bernanke's.

Dodd's proposal would mean major changes to Fed's system of 12 regional banks. For example, Fed banks in Kansas City, Mo., and St. Louis no longer would have any banks under their supervision.

Bernanke defended the Fed's structure of regional banks and a board based in Washington. He said it has provided policymakers "with a way to keep in close touch with the continent-spanning, highly varied economy of the United States."

Dodd, however, is pushing back at Bernanke's argument, noting that former Fed officials and others who have testified before his committee have made the opposite point — that bank supervision and monetary policy are not related.

Dodd's staff pointed to testimony from a former Fed vice chairman, Alice Rivlin, and a former Fed director of monetary affairs, Vincent Reinhart. "I didn't really experience that we learned a lot from the supervising particular banking institutions that was useful to monetary policy," Rivlin told the committee last July.

The Obama administration has supported a broader supervisory role for the Fed. Legislation passed by the House to overhaul the regulatory system wouldn't trim the Fed's banking duties. President Barack Obama, who used his Saturday radio and Internet address to back a financial overhaul, cited large banks that "engaged in reckless financial speculation without regard for the consequences — and without tough oversight."

Obama never mentioned the Fed by name in his remarks while praising Dodd for offering "a strong foundation for reform."

John Bowman, acting director of the Office of Thrift Supervision, on Saturday said that Congress should replace the current four banking regulators with two — one overseeing community banks and savings and loans, and the other in charge of big, complex commercial banks. Bowman made his remarks in a speech to the banking group gathering in Orlando.

As Congress moves forward on regulatory changes, Bernanke urged lawmakers to adopt a mechanism to safely unwind big financial companies whose failure could endanger the entire U.S. economy. The Fed chief renewed his support for a process similar to the one the Federal Deposit Insurance Corp. uses to dismantle failing banks.

"The unavoidable challenge is to make sure that size, complexity and interconnectedness do not insulate such firms from market discipline, potentially making them ticking time bombs inside our financial system," he said.

Bernanke urged Congress to waste no time in overhauling financial rules.

"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms," he said. "If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation." ... /id/353357