WASHINGTON — In an ironic twist, the Federal Reserve Board — one of the most derided regulators for its failure to prevent the financial crisis — may emerge from regulatory reform with its bank supervisory powers intact and authority enhanced.
A group of bipartisan lawmakers are leading the charge to restore most, if not all, of the central bank's authority over more than 800 state-chartered banks and roughly 5,000 holding companies to regulatory reform legislation. The current bill from Senate Banking Committee Chairman Chris Dodd would strip the Fed's powers over all but the largest 55 holding companies.
But Sen. Kay Bailey Hutchison authored an amendment introduced Friday to reverse that provision — and she and other lawmakers see enough support to succeed.
"Unless Chairman Dodd pushes back strongly for some reason … I don't see why there wouldn't be support for it," said the Texas Republican in an interview. Her amendment has nine co-sponsors, she said.
She is backed by Sens. Bob Corker, R-Tenn., and Jon Tester, D-Mont., among others, who said the Fed should keep its window into smaller institutions.
"There's no question in my mind before all is said and done that the Fed will maintain supervision of the smaller institutions that it now has," Corker said in an interview. He predicted "overwhelming support" for the amendment.
The situation marks an abrupt change of fortunes for the Fed from just a few months ago, when Chairman Ben Bernanke appeared in danger of being rejected by the Senate for his renomination. At that time, the anti-Fed rhetoric was so high that observers said it would be all but impossible for the central bank to wield enough political clout to save its supervisory powers in the Dodd bill.
But a relentless push from the Federal Reserve banks and their community bank allies has helped convince many lawmakers that stripping the central bank of its power would be a mistake. "The Federal Reserve presidents around the country have made a very good argument on why they should keep that supervision," Corker said.
Hutchison said it's important that country's monetary policy is shaped by the entire banking community. There are community banks that are "very significant and should have a place at the table through our regional Feds."
She argues that excluding community banks from the Fed's supervision creates an unlevel playing field against larger, complex institutions. "It gives the impression that there is 'too big to fail,' " Hutchison said. "That's exactly what we're trying to get away from."
A spokeswoman for Tester said the senator also "supports maintaining the Fed's current oversight of the state chartered bank system."
The American Bankers Association and the Independent Community Bankers of America have also lobbied on the issue and despite pessimism about other potential changes to the bill, predicted victory for the Fed.
"When the smoke clears from all this debate the Federal Reserve should be in pretty good shape," said Cam Fine, the president of the ICBA. "The Fed will end up retaining its state member banks … and will have some additional authority granted to it to help it oversee systemically risky institutions, as well."
Ed Yingling, the president of the ABA, said "we'll have the votes for it."
"Senators are listening. … They do not want the Federal Reserve to have a very narrow view of the economy looking through the window of only the largest banks," Yingling said.
With amendments expected to be offered this week, their confidence is all the more striking because of the level of support needed to pass any change to the bill. While amendments normally only require 51 votes to succeed, Senate leaders have indicated that any senator can request a 60-vote supermajority for passage.
The Fed's fate has ping-ponged wildly during the reform debate. The Obama administration and House pushed early on to give the central bank more power over systemically important companies. But several senators last year criticized that idea, including Dodd, who originally suggested leaving the Fed with no supervisory responsibilities.
After encountering heavy resistance, he eventually included a provision that would let the Fed oversee only holding companies with more than $50 billion of assets. That provision effectively made the central bank the systemic-risk regulator, but left the fate of the Federal Reserve banks in doubt since they would have lost many of their duties as the day-to-day overseer of 844 state banks and 4,974 holding companies.
As a result, Bernanke, along with the 12 district bank presidents stepped up their efforts to keep the Fed's current role. "The Fed has had its own drumbeat of publicity at work," said Brad Sabel, co-leader of Shearman & Sterling LLP's economic stabilization advisory group. "From Chairman Bernanke on down, they have been making a big deal about having direct contact with Main Street as well as Wall Street."
The result is that the Fed is likely to have its cake and eat it too. If the amendment succeeds, the Fed will gain power to serve as systemic regulator but not lose any of its current responsibilities. It also is likely to be home to a proposed independent consumer protection division, despite widespread criticism of its previous use of consumer powers. That, observers said, is consistent with prior crises — which always result in the Fed's gaining, not losing, authority. "The Fed has never lost power. It's always gotten bigger and stronger," said Douglas Landy, a partner at Allen & Overy LLP.