During the past 55 years as a banker and banking lawyer, I have worked closely with all levels of management at both the Federal Reserve Board and the Federal Reserve Bank of New York. In my judgment, they are by far the best safety and soundness regulators in the U.S.
Though the Fed's role has changed over the years, one thing has not: its status as the world-class safety and soundness regulator at the intersection of rules, principles and instinct.
Sadly, it seems to be open season on the Fed. The central bank has been criticized for doing too little, too late or too much on too little. It allegedly did not issue rules under Regulation Z and the Home Ownership and Equity Protection Act that could have curtailed the subprime crisis and supposedly should have been more active as an umbrella bank regulator.
Add to this the other negative currents, such as the Senate Banking Committee proposal on regulatory restructuring, which calls for a single, consolidated National Bank Supervisor, or NBS, relegating the Fed to the supervision of our payments system and managing our monetary policy and money supply.
Similarly, in the House, Financial Services Committee Chairman Barney Frank, D-Mass., appears to have lost confidence in the Fed.
Another arrow has come from Rep. Ron Paul, R-Texas, whose bill would have the General Accountability Office audit the Fed's monetary policy decisions. And finally, we had the Senate theatricals surrounding Fed Chairman Ben Bernanke's confirmation hearing.
The Regulation Z and HOEPA charges lack merit since the lenders and mortgage brokers that created most of the real estate problems were not subject to Fed regulation.
The umbrella regulator attack has little real weight since the Fed, for the most part, was required to operate through, and rely on, the line bank regulators (except for state member banks).
The NBS regulatory consolidation concept makes sense as far as line bank regulators are concerned but should leave the Fed in the systemic-risk regulator role.
Paul's proposal seems at odds with any previous understanding of the Fed's charge to manage monetary policy and the money supply, leaving scores of questions for policymakers.
The Fed had no jurisdiction over the investment banks, Freddie Mac or Fannie Mae, which contributed to the financial crisis. The Securities and Exchange Commission had jurisdiction over the investment banks but apparently not enough authority to deal with their problems.
Looking at the record as a whole, I believe the Fed, together with the Treasury, saved our financial system. We did not have a meltdown. For that, all of us owe a great debt to Chairman Bernanke, Treasury Secretary Timothy Geithner and former Treasury Secretary Hank Paulson for handling the crisis. It reminded me of the days after 9/11. And it was great seeing the Beltway working Wall Street hours!
I totally agree with, and support, the remarks of the chairman at his swearing in ceremony on Feb. 3: "The past four years have been an extraordinary time. In many respects, this period has shown this institution at its finest, as we moved rapidly, forcefully and creatively to confront the deepest financial crisis since the Great Depression and help prevent a looming economic collapse."
The Fed, today, is revered around the world, and "Fed bashing" by critics only hurts the U.S. in the international financial services arena. If we continue to denigrate the Fed, whom or what will we develop to replace it? Though the Treasury also is respected, it is a branch of the U.S. government, carrying with it all the usual political baggage.
For their parts, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are viewed similarly to the Treasury. Though the comptroller's office is a solid safety and soundness regulator for national banks, the FDIC is basically an insurer.
Where should we wind up? First off, all of the Fed's traditional (that is, central bank-like) powers, including its discount window operation, should be continued. It should be appointed our systemic-risk regulator. It should also have regulatory authority over our largest financial holding companies but probably give up its line supervision of state member banks.
From all the available data, the Fed deserves to remain as our main safety and soundness regulator. Any negative tampering with its core functions and responsibilities could have a severe negative effect on the bank regulatory system, both at home and abroad. Viable alternatives simply do not exist.
