Bernanke to tell Congress: Don't Scale Back Fed Banking Supervision

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Bernanke to tell Congress: Don't Scale Back Fed Banking Supervision
By: JEANNINE AVERSA and JIM KUHNHENN
Associated Press
03/17/10 10:50 AM EDT

WASHINGTON — Federal Reserve Chairman Ben Bernanke will make the case to Congress on Wednesday that the Fed should retain supervision of smaller banks.

In testimony prepared for a House hearing and obtained by The Associated Press, Bernanke plans to wage a fresh battle against Senate efforts to scale back the Fed's role in overseeing America's banks.

The Fed boss will argue that policymakers factor information they get from the Fed's role as bank regulator into their decisions on interest rates. And, Bernanke said its banking duties give the Fed insights into the health of the entire banking system.

"The insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability," Bernanke said in his prepared remarks to the House Financial Services Committee.

Bernanke's testimony comes as the Fed faces a significant shift in its supervisory duties.

In an effort to overhaul the nation's financial regulatory structure, Senate Banking Committee Chairman Christopher Dodd, has offered legislation that 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 with 35 of the biggest bank holding companies under its supervision.

It currently oversees about 5,000 bank holding companies, about 850 smaller banks that are both state-chartered and are members of the Federal Reserve system and some foreign banks operating in the United States.

"Notably, the Federal Reserve's role as a supervisor of state member banks of all sizes, including community banks, offers insights about conditions and prospects across the full range of financial institutions, not just the very largest, and provides useful information about the economy and financial conditions throughout the nation," Bernanke said in his prepared remarks. "Such information greatly assists in the making of monetary policy," he said, referring to the Fed's role in setting interest rates to influence economic growth, employment and inflation.

Dodd's bill, however, would also give the Fed new powers to oversee nonbank financial firms that are so large and interconnected that their failure could pose a risk to the economy.

Such firms could include insurance giant American International Group Inc., or General Electric Co.'s GE Capital business.

But with its narrower authority, the Fed's system of 12 regional banks could face profound changes. The Kansas City Federal Reserve Bank and the St. Louis Federal Reserve Bank, for instance, would have no banks under their supervision.

The Obama administration has supported a broader supervisory role for the Fed.

Former Fed Chairman Paul Volcker, who currently serves as economic adviser to Obama, also has argued for the Fed to retain supervision over all the banks it now oversees.

Dodd's bill would also place an independent consumer watchdog inside the Fed. The Consumer Financial Protection Bureau, however, would have its own director appointed by the president and would not fall under the authority of Bernanke.

The administration has called for a freestanding consumer agency, an approach that would strip the Fed of its consumer-protection responsibilities. The House-passed version of a financial revamp resembles the administration's approach. Bernanke has argued that despite past weaknesses, the Fed should retain its consumer-protection duties. He didn't address the matter in his testimony prepared for Wednesday.

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