Congress' GAO Opens Investigation of Fed's Bank Oversight

The government agency that performs audits and investigations for Congress has opened an examination into the Federal Reserve’s supervision of large banks to determine if the central bank is overly influenced by the institutions it oversees.

The General Accounting Office is in “the initial stages” of an investigation requested by California Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, and fellow Democrat, Representative Al Green of Texas, according to GAO spokesman Charles Young.

“We’ll be examining regulatory capture at the Fed, but I can’t speak to exactly what was in the letter,” said Young, referring to the lawmaker’s written request. Regulatory capture refers to the phenomenon of a regulatory agency falling under the sway of the industry or companies it is charged with supervising.

Young said the inquiry may cover other financial regulatory agencies, but would confirm only that the New York Fed, which supervises some of the largest U.S. banks, will be included.

“We will cooperate with the GAO as its work on this report proceeds,” said Eric Kollig, spokesman for the Washington-based Fed Board.

The Fed attracted considerable criticism for its failure to prevent excessive risk-taking by U.S. banks in the lead-up to the financial crisis of 2008-09, which triggered the worst recession in the U.S. since the Great Depression.

Fed Governor Daniel Tarullo, who oversees supervision and regulation, overhauled the central bank’s approach following his appointment in 2009. He re-established the Board’s authority on oversight, and created a new team of risk hunters comprised of market specialists, lawyers and senior examiners that looks at developments across institutions. Tarullo has also overseen the Fed’s annual stress tests, designed to inspect the resiliency of the biggest banks in dire economic scenarios.

Despite toughened scrutiny, there have been some nasty surprises. JPMorgan Chase & Co. lost at least $6.2 billion in trading in 2012, and the Fed’s inspector general criticized the New York reserve bank for botched oversight.

The GAO investigation was reported earlier by Reuters.

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