NEW YORK — Federal Reserve Bank of Dallas President Thomas Hoenig argued Thursday against stripping the central bank of its bank-oversight role and said it was especially important for the Fed to continue to watch over smaller banks.

"The strong opposition to removing the Federal Reserve from regional and community bank supervision, voiced by myself and others from the Federal Reserve, is not driven by the idea of simply protecting our 'turf' or saving Federal Reserve jobs," Hoenig said.

Instead, watching over smaller banks, as well as large institutions, is a core mission of the Fed, and taking that power away could create real problems.

"Stripping the Federal Reserve of its responsibility for supervising regional and community banks and bank holding companies should be unacceptable to anyone who cares about equity in the nation's banking system, largest to smallest bank, and the nation's regional and local economies," Hoenig said.

"Confining the Federal Reserve's supervisory role to only the largest firms will, I fear, inadvertently make the Federal Reserve the central bank to the largest firms while disenfranchising the other 6,800 banks," the official said.

The policy maker's comments came from the text of a speech in Washington given to the American Bankers Association Government Relations Summit. The voting member of interest-rate setting Federal Open Market Committee said nothing in his formal remarks about the economic- or monetary-policy outlook, which is not unexpected given that body met Tuesday in a gathering that left overnight rates unchanged at effectively 0%. Hoenig dissented at the meeting, saying the Fed's pledge to keep rates low for an extended period could fuel future financial imbalances.

Hoenig's speech in Washington comes as Congress considers legislation that could see the central bank stripped of its oversight of banks, though there is considerable uncertainty how that might play out. Central-bank officials have been pushing back hard to retain this capability, arguing that they are up to the job despite past mistakes. Moreover, Fed officials argue their monetary-policy-making mission is enhanced by the insights gained from overseeing the financial system.

Hoenig's speech was centered on the role of community banks, and he said that in a time of huge government bailouts for larger financial institutions, the matter of fairness looms large.

"Community banks are important to the banking system and to the economy, and therefore continue to be important to the Federal Reserve," Hoenig said. "It would be a tragic irony if the outcome of this crisis is a gain in power for the largest firms at the expense of the other 6,800 regional and community banks. If so, it would be a win for Wall Street."

Hoenig noted that community banks, despite being under pressure, have been valuable providers of credit during the troubles of recent years.

"Regional and community banks have managed all this while operating at a competitive disadvantage," because "the largest financial firms that have an implicit, recently made explicit, guarantee that taxpayer dollars will be used to protect them from failure, regardless of what risks they assume," Hoenig said.

For these smaller banks, "it will be a struggle for them to regain their footing," the central banker said. "Commercial real estate will be a drag on earnings for some quarters yet, and there will be bank failures," he added.

"This segment of the industry will recover and its model, with its focus on relationship banking, will prosper as the economy recovers and expands," Hoenig said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.