Chiefs Say Fed Needs Oversight of Small Banks

WASHINGTON — Federal Reserve Board Chairman Ben Bernanke offered a vigorous defense of his agency's oversight of holding companies and state banks, rejecting a Senate bill that would strip them of supervisory powers over all but the biggest institutions.

Under the bill by Senate Banking Committee Chairman Chris Dodd, the Fed would oversee only holding companies with $50 billion or more of assets — a population of only 55 companies — while losing oversight of approximately 5,000 other institutions.

But Bernanke, in what was his strongest comments on the issue to date, said oversight of smaller firms was vital not just for monetary policy but the stability of the system itself.

"We are quite concerned by proposals to make the Fed a regulator only of the biggest banks," Bernanke told the House Financial Services Committee. "It makes us essentially the 'too big to fail' regulator. We don't want that responsibility. We want to have a connection to Main Street as well as to Wall Street. We need to have insights into what is happening in the entire banking system."

Bernanke warned it would be "quite destructive" to close off the Fed from smaller institutions, saying small and midsize banks have been key to crises in the past, including the savings and loan crisis.

"Smaller and midsize banks are very valuable to us and provide very valuable information both in terms of understanding the economy and financial stability," he said. "We need exposure to the entire economy and a broad mix."

He was backed by former Fed Chairman Paul Volcker, now the chairman of the Economic Recovery Advisory Board, who said the Fed needs to have oversight of banks.

"Monetary policy and concerns about the structure and conditions of banks and the financial systems are inextricably intertwined," he said. "Neither monetary policy nor the financial system will be well served if our central bank is deprived from interest in, and influence over, the structure and performance of the financial system."

Volcker also warned that setting a $50 billion-asset threshold could expand the number of banks considered "too big to fail."

That threshold is "much too low," he said.

Although Bernanke and Volcker were speaking in the House, their message was primarily aimed at the Senate, where Dodd is due to begin a debate Monday in the Banking Committee on his reform bill.

Still, some House lawmakers were not particularly receptive.

"Even if supervision improves, it's not clear oversight informs monetary policy," said Rep. Spencer Bachus, the lead Republican on the panel.

The House has already passed its reform bill, which would give the Fed more power to oversee systemic risks, but not take any supervisory authority away.

Bernanke also appeared open to corporate governance changes at the Federal Reserve banks. Each of the 12 banks has their president chosen by their board, which includes members of the institutions they supervise — a practice that has come under severe criticism.

Rep. Emanuel Cleaver, D-Mo., asked Bernanke whether that system should be changed. "Regional bank presidents and their boards could be viewed as captive," he said.

Bernanke denied a conflict existed, but suggested he was open to changing the system.

"The perception of conflict is more perception than reality," he said. "We would be open to discussing changes."

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