Dudley Defends Integrity of New York Fed Bank Examiners

William C. Dudley, president of the Federal Reserve Bank of New York, defended his bank-supervision staff following allegations that they had been too deferential to large financial firms.

“I completely stand behind the integrity and work of our supervision staff,” he said after a speech today in New York. “They are operating completely in the public interest.”

Dudley’s remarks, his first addressing allegations of lax supervision aired last week by former employee Carmen Segarra, highlight the New York Fed’s difficulties in overcoming perceptions that it’s too close to Wall Street.

“This is a zero-credibility era for big banks and their regulators,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. As a result, stories like Segarra’s “have a lot of resonance regardless of their truth,” she added.

Dudley turned voluntarily to the topic after getting no questions about it from the audience at New York University’s Stern School of Business. He said there had been a “significant reorganization” following a report commissioned by the regional Fed bank, and that “improving supervision has been and remains an ongoing priority for me.”

The 2009 report, by Columbia University Professor David Beim, made recommendations to improve bank supervision, including that Fed officials should seek to keep their distance and be more skeptical of the banks they oversee.

Radio Broadcast

Dudley’s comments follow reports last week on the radio program “This American Life” and ProPublica, a nonprofit news organization. The radio program broadcast excerpts of conversations it said were secretly recorded by Segarra, a former New York Fed bank examiner fired in 2012, with some of her colleagues and her supervisor.

In a transcript of the broadcast, Segarra described how she felt that her Fed colleagues were afraid of Goldman Sachs Group Inc. and handled it with kid gloves.

“I don’t think anyone should question our motives and what we are trying to accomplish,” Dudley said today in defense of his institution. “We want the U.S. economy and the public to do as well as possible.”

Segarra didn’t immediately respond to a request for comment made through her spokesman, Jamie Diaferia.

The allegations prompted Massachusetts Democratic Senator Elizabeth Warren to call for a congressional probe into the Fed, which is already under fire from lawmakers on Capitol Hill who want its actions to be more closely audited.

Dudley, himself a former chief U.S. economist and managing director at Goldman Sachs, said that his bank-supervision staff were rotated regularly to ensure their independence from any individual financial firm.

Track Record

“Let’s focus on the actual track record of what we’ve actually accomplished,” he said. “Have we made the banking system safer? I don’t think there can be any dispute to that, and we’re committed to continue to push in that direction.”

Dudley was speaking after he made remarks about efforts to overhaul the London Interbank Offered Rate, a series of benchmarks for $300 trillion in financial securities worldwide, which has been at the center of official inquiries since 2008.

In the speech, he returned to a topic he has been outspoken about in the past: ethical failures of the banking industry. The New York Fed will hold a behind closed-doors conference on changing behavior in the financial services industry on Oct. 20.

“The banks have to want to have a better culture,” Dudley said in response to a question from the audience. “I don’t think culture is something that can be imposed from the outside by regulation or supervision, so the banks have to want to do this.”

“The penalties for bad behavior have gone up significantly, and so I think the banks really now understand what the consequences are to them of bad behavior. And I think some bankers are frankly ashamed by what’s happened in some of their institutions.”

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