The Federal Reserve beat back two of the biggest threats in decades to its political independence and bank-oversight powers, surmounting congressional anger over its role in the financial crisis.
U.S. senators voted 90-9 yesterday to void a provision in regulatory-overhaul legislation that would have stripped the Fed of oversight of 5,000 banks with less than $50 billion in assets. A day earlier, senators rejected a measure to allow continuous congressional audits of Fed policies.
The wins mark a shift in favor of Fed Chairman Ben S. Bernanke, who in January won a second term by a 70-30 vote in the chamber, the most opposition in history. Fed officials and banks lobbied lawmakers over concerns about potential political interference with monetary policy and a diminished role for the regional Fed banks, which directly supervise firms and help set interest rates.
“They pack a hell of a punch, and they know it,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington consulting firm specializing in financial regulation, whose clients include the biggest U.S. banks. “The Fed’s institutional gravitas is profound, including the depth of staff it has. It is unique among the financial regulators.”
Bernanke may now have a freer hand to decide when and how fast to unwind record monetary stimulus begun during the financial crisis, while being less vulnerable to criticism that the Fed favors large Wall Street financial institutions. The Senate votes also removed a threat to the 12 regional Fed banks from a provision that would have limited the supervision of many of them to a few banks or none at all.
The Senate vote means the Fed will retain a supervisory scope that includes the biggest banks, such as Bank of America Corp. and Goldman Sachs Group Inc., and smaller firms such as Central Virginia Bankshares Inc., with assets of $473 million.
The Senate yesterday approved the amendment on Fed supervision offered by Kay Bailey Hutchison, a Texas Republican, and Amy Klobuchar, a Minnesota Democrat, to let the Fed keep a hand in oversight of smaller banks throughout the country. “This amendment ensures that the nation’s monetary policy has a connection to Main Street and not just Wall Street,” Klobuchar said before the vote.
Less than 24 hours earlier, the Senate voted 96-0 to approve an amendment from Bernard Sanders, a Vermont independent, requiring a congressional watchdog to conduct a one-time audit of every Fed emergency action since 2007. The chamber rejected 62-37 a measure from Louisiana Republican David Vitter that would have allowed for repeated audits while changing a law exempting the Fed from monetary-policy exams.
The votes “maintain the independence of the Fed to a substantial degree,” said former Fed Governor Lyle Gramley, now senior economic adviser at Potomac Research Group in Washington.
The broader legislation still requires approval by the Senate and reconciliation with the House version, passed in December, before it can be sent to President Barack Obama for his signature.
The turn in the Fed’s favor resulted from campaigning by Bernanke, the banking industry and regional Fed presidents including Kansas City’s Thomas Hoenig who decided to directly contact legislators in their regions.
“The district banks became very active in the debate and stated their case very effectively,” said Camden Fine, president of the Washington-based Independent Community Bankers of America, a trade group for almost 5,000 firms.
In addition, ICBA members made or sent more than 3,000 phone calls and e-mails to senators in recent days urging passage of the Hutchison measure, Fine said.
That helped overcome criticism from Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, who has called the Fed’s oversight before the financial crisis an “abysmal failure.”
Alabama Senator Richard Shelby, the panel’s senior Republican, cited the Fed’s “history of failure in supervision and regulation” as he cast a vote against Bernanke in January. Shelby also voted for a more aggressive audit of the Fed this week.
The “Senate vote affirms that the overwhelming majority of senators recognize the importance of these connections,” Hoenig, the longest-serving Fed policy maker, said in a statement yesterday.
Fed officials are debating when to scrap a pledge that the benchmark rate will remain close to zero for an “extended period” and when to start selling more than $1 trillion of mortgage-backed securities purchased since the start of 2009.
Share of Detractors
The Fed still has its share of detractors in Congress, most of all Representative Ron Paul, the Texas Republican and author of the book “End the Fed,” whose broader, House-passed measure to audit the central bank was endangered by Senate approval of the Sanders measure.
“Everything they touch, they ruin,” Paul said of the Fed in an interview yesterday. At the same time, “we should look to the positive side, and one of the best positives is the fact that more people in America today probably know more about the Fed than they probably ever have.”
The legislation isn’t entirely what the Fed wants. It requires disclosure of more information about emergency programs than Bernanke has said the Fed was willing to provide. The broader bill would make the New York Fed president a political appointee and remove commercial banks from their role in choosing regional Fed presidents.
Fed officials haven’t opposed those changes as fiercely as the proposals on audits and supervision.
Aftermath of Reform
The Fed may emerge from the aftermath of financial reform legislation with a broader and politically riskier mandate. The Dodd bill calls for the Fed to be the enforcer for stricter guidelines on capital, liquidity and risk management for financial firms that pose risks to the financial system.
Internally, the Fed is already preparing for a larger role. Bernanke and Fed Governor Daniel Tarullo have redesigned the approach to supervision. Capital markets and monetary policy experts will now sit on an internal Fed board with bank supervisors and try to work together to spot risks.
“It is a considerable challenge,” said Vincent Reinhart, an American Enterprise Institute scholar and former Fed monetary-affairs chief who has said the central bank doesn’t need supervision powers. “If it doesn’t live up to its promises and politicians’ expectations, then it will be a vengeful Congress that deals with it in the future.”