Fed Will Retain Oversight of Small Banks after Senate Vote

The U.S. Senate today approved an amendment to the financial-overhaul bill to retain the Federal Reserve’s powers to supervise small banks, in a victory for the central bank and industry lobbyists.

Lawmakers voted 90-9 for the amendment offered by Senator Kay Bailey Hutchison. The Senate bill, as written by Banking Committee Chairman Christopher Dodd, would have limited the Fed’s jurisdiction to banks with more than $50 billion in assets, including Goldman Sachs Group Inc. and Morgan Stanley.

The Fed should keep its powers so Fed banks “all over the country will have the input of the community banks in our system rather than making monetary policy from New York and Washington,” Hutchison, a Texas Republican, said yesterday.

The vote marked the second day in a row that the Fed dodged attempts to rein in its powers. Senators yesterday rejected a plan for continuous congressional inquiries into central bank policy, approving instead a one-time audit of Fed emergency actions since December 2007. The sponsor, Senator Bernard Sanders, a Vermont Independent, narrowed his original audit plan amid concerns it threatened the Fed’s independence.

Dodd, a Connecticut Democrat who voted against the Hutchison amendment, is among lawmakers who have criticized the central bank for failing to curb lending abuses that led to the financial crisis. “My concern has been that the Fed did not exactly live up to its reputation” and “contributed in major ways to the problems we are in today,” he said during debate.

Photographer: Jay Mallin/Bloomberg

Senator Kay Bailey Hutchison. Close

Senator Kay Bailey Hutchison.

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Photographer: Jay Mallin/Bloomberg

Senator Kay Bailey Hutchison.

Bernanke’s Argument

Dodd’s bill would have moved oversight of smaller banks now supervised by the Fed to the Federal Deposit Insurance Corp., which oversees smaller banks, and the Office of the Comptroller of the Currency, the regulator of national banks.

The Fed urged senators to remove that language from the bill, saying the central bank needs an overview of the entire system to set monetary policy. Fed Chairman Ben S. Bernanke said in March that the Fed’s “participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions.”

Presidents of the regional Fed banks, including Thomas Hoenig of the Kansas City Fed and the Dallas Fed’s Richard Fisher, stepped up their lobbying efforts in February, writing and visiting senators to make their case for keeping supervision. Under Dodd’s bill, 11 of the 12 regional Fed banks would see their supervision reduced to just a few or no banks.

Fisher “came to my office to make this point most affirmatively, that he wanted to make sure he still had the supervisory power and the ability to learn from the state banks, the community banks in the whole region,” Hutchison said yesterday.

Visiting Congress

Financial-industry lobbying groups, including the Washington-based Independent Community Bankers of America and the American Bankers Association, have blanketed congressional offices with visits from small-bank executives to urge senators to allow the Fed to keep its powers.

“Without a window into the nation’s community banks, monetary policy and Federal Reserve bank operations would become badly skewed to a Wall Street bias,” ICBA president Camden Fine said today in an e-mail. “That serves neither Main Street nor Wall Street’s interests.”

Lyle Gramley, a former Fed governor, now senior economic adviser at Potomac Research Group in Washington, said after the vote: “This is important in terms of retaining the kind of strength that the reserve banks have in the policy-making process.”

Without the supervisory powers, Gramley said, the regional banks’ influence could have diminished over time and “created a Federal Reserve system dominated by what’s going on in Washington.”

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

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