The Wall Street Journal
WASHINGTON—Facing the stripping of some its powers, the Federal Reserve on Thursday took the rare step of laying out its case for continuing to supervise the U.S. banking system.
In a letter to lawmakers, the Fed acknowledged regulatory "shortcomings," cited improvements it has made to its practices and worked to illustrate how its supervisory and monetary policy roles complement one another.
"Elimination of the Federal Reserve's role in supervision would severely undermine the Federal Reserve's ability to obtain in a timely way and to evaluate the information it needs to conduct its central banking functions effectively," the Fed said.
Its argument includes several points laid out over 12 pages:
-The Fed said its participation in the banking system "significantly improves" its ability to carry out its central banking duties. "Federal Reserve's ability to effectively address actual and potential financial crises depends critically on the information, expertise, and powers that it gains by virtue of being both a bank supervisor and a central bank," it said.
-The Fed said it recognizes that bank supervision needs to be more effective, noting that it is working to improve its capital and liquidity regulation and has begun changing the way it oversees large banking organizations. "These changes are intended to ensure that we fully employ our expertise to implement a more systemic and effective approach to our supervisory activities going forward," it said.
-The Fed noted that the shadow banking system and firms not under its own supervision were among the biggest drivers of the financial crisis. "These firms...were instead subject to consolidated supervision under statutory or regulatory schemes that were far less comprehensive than that applicable to bank holding companies," the letter said.
The Fed conceded that it can't and shouldn't be responsible for overseeing the entire financial system. "No agency has the breadth of expertise and information needed to survey the entire system," it said.
Still, it argued, "Both effective consolidated supervision and addressing macroprudential risks require a deep expertise in the areas of macroeconomic forecasting, financial markets, and payments systems. As a result of its central banking responsibilities, the Federal Reserve possesses expertise in those areas that is unmatched in government and that would be difficult and costly for another agency to replicate."
The letter comes as the nation's central bank is facing increasing criticism on Capitol Hill, which is considering stripping away some of its regulatory powers, and as Ben Bernanke still hasn't seen his continued role as Fed chairman reconfirmed.
In a letter to lawmakers, the Fed acknowledged regulatory "shortcomings," cited improvements it has made to its practices and worked to illustrate how its supervisory and monetary policy roles complement one another.
"Elimination of the Federal Reserve's role in supervision would severely undermine the Federal Reserve's ability to obtain in a timely way and to evaluate the information it needs to conduct its central banking functions effectively," the Fed said.
Its argument includes several points laid out over 12 pages:
-The Fed said its participation in the banking system "significantly improves" its ability to carry out its central banking duties. "Federal Reserve's ability to effectively address actual and potential financial crises depends critically on the information, expertise, and powers that it gains by virtue of being both a bank supervisor and a central bank," it said.
-The Fed said it recognizes that bank supervision needs to be more effective, noting that it is working to improve its capital and liquidity regulation and has begun changing the way it oversees large banking organizations. "These changes are intended to ensure that we fully employ our expertise to implement a more systemic and effective approach to our supervisory activities going forward," it said.
-The Fed noted that the shadow banking system and firms not under its own supervision were among the biggest drivers of the financial crisis. "These firms...were instead subject to consolidated supervision under statutory or regulatory schemes that were far less comprehensive than that applicable to bank holding companies," the letter said.
The Fed conceded that it can't and shouldn't be responsible for overseeing the entire financial system. "No agency has the breadth of expertise and information needed to survey the entire system," it said.
Still, it argued, "Both effective consolidated supervision and addressing macroprudential risks require a deep expertise in the areas of macroeconomic forecasting, financial markets, and payments systems. As a result of its central banking responsibilities, the Federal Reserve possesses expertise in those areas that is unmatched in government and that would be difficult and costly for another agency to replicate."
The letter comes as the nation's central bank is facing increasing criticism on Capitol Hill, which is considering stripping away some of its regulatory powers, and as Ben Bernanke still hasn't seen his continued role as Fed chairman reconfirmed.
