The Federal Reserve banks across the U.S. play an unheralded role, and the fundamental objectives underlying the design of the Federal Reserve System — to address the monopolistic power of a handful of banks, to promote industry diversity and to create a check on concentrated power — are just as relevant today as they were in 1913, when the Fed was established.
Thanks to their knowledge of the regions the serve, the banks provide the board with vital regional economic data and local trends. This local economic expertise is critical to the functioning of the Fed's monetary policy responsibilities.
The Fed bank presidents also offer unique independent thought on an array of financial and economic issues. The opinions of these independent experts prove that solutions and innovations are not only born within Washington, and that policymakers often benefit from opinions originating outside of the Beltway.
Examples of this independent thinking include Federal Reserve Bank of Kansas City President Tom Hoenig's call to address the issue of "too big to fail" banks by holding these firms accountable for their condition and performance. Former Federal Reserve Bank of St. Louis President William Poole warned several years ago about taxpayer exposure to the GSEs. And Federal Reserve Bank of Richmond President Jeffrey Lacker has gone on record as supporting ending implicit government guarantees of certain firms by creating a resolution regime for the largest institutions.
As a regulator of state-chartered banks, I value the relationship I have with the Federal Reserve banks, as well as the FDIC, as we work to create a coordinated system of supervision for insured depository institutions. The banking system benefits from multiple regulatory perspectives, and the checks and balances they entail. The system is safer and more diverse as a result.
Any financial regulatory reform must preserve the role of the Fed banks and continue to grant them independence from the political whims of Washington. The financial collapse has proven that regulatory reform is needed. However, a concentration of assets in the hands of a few megabanks and a consolidation of supervision in Washington and New York is simply not the solution.
Instead, we must enhance our system of supervisory checks and balances to ensure that more eyes, not fewer, are focused on the activities of our financial institutions. Further, we must create a regulatory regime that encourages industry diversity to provide system stability and ensure availability of credit to all corners of the nation. Preserving the Fed banks' role is one piece of the puzzle.