WASHINGTON — The Federal Reserve Board's recent decisions to enhance consumer protection regulation and crack down on industry compensation practices do not appear to be assauging critics in Congress.

In the past two weeks, the Fed announced it would begin supervising nonbank subsidiaries of bank holding companies for compliance with consumer protection rules. That move was followed by word that the central bank is crafting a proposal designed to restrict inappropriate executive compensation practices at financial institutions.

Those steps come as the prospect of the Fed becoming the systemic risk regulator look increasingly bleak. Though the Fed makes no mention of Congress when discussing its latest actions, observers say its proposals are being developed with one place in mind — Capitol Hill.

"They're talking to the Hill," said Gil Schwartz, a former Fed lawyer who is now in private practice. "They're saying the Fed is engaged and they should be anointed with the mantel of the systemic regulator."

Brian Gardner, an analyst at KBW Inc., agreed, saying the central bank was also trying to prove it does a good job of protecting consumers.

"This seems to be a very different Fed than what we're used to, and it certainly seems like they're increasing the changes and proposals and trial balloons at a time when Congress is toying with the idea of a consumer financial protection agency and systemic risk," he said. "I don't believe in coincidences."

For its part, the Fed is not actively lobbying Congress for either systemic risk or consumer protection powers. A Fed source insisted the agency was considering these issues well before regulatory reform became a top priority in Congress; executive compensation rules have been discussed since at least March 2008.

Still, the Fed seems to be fighting on at least two fronts — systemic risk and consumer protection.

The compensation proposal, which could be released within weeks, is seen as an attempt by the Fed to show lawmakers a willingness to tackle the broad issues that contributed to the financial crisis.

"The message they're sending subliminally is 'hey look at these gaps,' " said Cornelius Hurley, a former Fed lawyer who now directs the Morin Center for Banking and Financial Law at the Boston University School of Law. "Congress can read that and say, 'Yes, we need to fill those gaps … and you're the logical party to do it.' "

Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial, said the Fed's move has the added bonus of reminding lawmakers, who have been in an intense debate over health-care reform, that a financial overhaul is still necessary.

"They want to keep things moving," he said. Fed Chairman Ben Bernanke "is primarily concerned with making sure that we get this done while it's still possible."

Meanwhile, the Fed is also trying to establish credibility in the realm of consumer protection, a power the central bank could lose if Congress goes along with a proposal by the Obama administration to create the CFPA. To that end, the Fed's Sept. 15 decision to hold the nonbank subsidiaries of bank holding companies to the same standards as their parent firms on consumer issues could help.

"Where did we get in trouble during the crisis?" asked Kevin Jacques, a Treasury Department official during the Bush administration who now chairs the finance department at Baldwin-Wallace College. "Not the bank but with what was going on with the subsidiary. The Fed is now saying they're taking bold action."

The Fed could further beef up its consumer strategy later this year by finalizing an overdraft protection proposal that could require customers to opt in to such programs.

Though the Fed is making an effort, there is widespread skepticism that any of these moves will ultimately help the central bank reach its goals.

For one, the Fed faces an emerging threat from several members of the Senate Banking Committee, including Chairman Chris Dodd, who are pushing for a single prudential regulator that would strip the central bank of all of its supervision powers.

House Financial Services Committee Chairman Barney Frank "is always ready to talk," Low said. "But Chris Dodd has been much harder on the Fed. He has been pretty clear that as far as he's concerned, the Fed was part of the problem; it contributed to the financial crisis."

In a hearing on Friday, Frank applauded the compensation proposal.

"The majority in the House clearly welcomes that because the majority in the House voted just before we recessed for the summer to direct bank regulatory and financial services agencies … to do exactly what you are proposing," he said. "So there's a great complimentarity here."

Still, others question whether the Fed's proposal might instead harden the stance among many Republicans and conservative Democrats who might see the proposal as another example of the Fed trying to consolidate power.

"We seem to be radicalizing these things," said Steve Wyatt, the chairman of the finance department at Miami University's Farmer School of Business. "The extreme right says we should get rid of the Fed and then you have the other extreme say we're going to regulate everything. Both of those are pretty foolish ways to go."

Regardless of the motivation, others say the Fed's proposal could still make for good policy.

"There's a certain amount of a fear factor on the part of the Fed," Hurley said. "But you can be fearful and do the right thing at the same time. …It's in their interest to be more active than they have been but it's ok if the end result is positive.

The Fed's move to scrutinize nonbank subsidiaries does not appear to have changed minds on Capitol Hill about its consumer protection record.

Frank released a scathing "report card" Wednesday that the Massachusetts Democrat said demonstrated "the poor record of the Federal Reserve in using the tools provided by Congress to protect consumers from abusive financial industry practices."

He said the Fed only proposed rules clamping down on abusive mortgages, credit card practices and overdraft fees after Congress began legislating on the issues. Bernanke has acknowledged that the Fed acted too late to rein in lending but Frank said that the central bank's inaction justified the creation of the consumer protection agency.

Such pessimism is leading some observers to question what the Fed thinks it stands to gain by taking action on compensation and the nonbank subsidiaries. "I'm hard pressed to think of this as having any upside," Jacques said.

Gardner seconded that sentiment. "It's just fraught with peril because the more power they have, the more those who want a greater oversight role for Congress gain traction," he said. "That used to be an idea that was limited to libertarians and populist Democrats but it has gone beyond that and is now becoming mainstream."

Proof of that idea came Friday when the House Financial Services Committee held a hearing on a proposal that would have once seemed unthinkable — allowing the Government Accountability Office to audit the Fed's monetary policy. The proposal's primary author, Rep. Ron Paul, R-Texas, has won 295 co-sponsors.

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.