The Federal Reserve's oversight of banks of all sizes is indispensable to the central bank's crafting of monetary policy, Fed Chairman Ben Bernanke testified Wednesday.
Under Sen. Chris Dodd's recently introduced financial reform package, the Fed would be essentially stripped of its regulatory duties related to banks with less than $50 billion in assets. Twelve regional Fed banks supervise about 5,000 bank holding companies and 850 state member banks under the current Federal Reserve System.
‘The Federal Reserve's participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions," Bernanke told the House Financial Services Committee Wednesday. Bernanke said the Fed's role as supervisor of state member banks, including community banks, "offers insights about conditions and prospects across the full range of financial institutions – not just the very largest – and provides useful information about the economy and financial conditions throughout the nation.
"Such information greatly assists in the making of monetary policy," he added.
The central bank's chairman also told the House committee that the Fed is concerned about Dodd's proposal for the Fed to only regulate the biggest banks, as doing so "makes us essentially the too-big-to-fail regulator," he said.
On Tuesday, the Conference of State Bank Supervisors (CSBS) issued a statement in response to the Dodd legislation that also advocated preserving the Federal Reserve Banks' current roles.
"Removing supervisory authority over community banks from the Reserve Banks would be a significant erosion of the Reserve Bank's check on the big-bank-centric Washington view of the world," said Neil Milner, CSBS' president and CEO. "By limiting the Federal Reserve's authority to only the largest bank holding companies, we fear an unavoidable bias towards the biggest firms will slant their perspective of the industry's composition."
Gerald P. O'Driscoll, a Cato Institute senior fellow and former vice president at the Dallas Fed, told the Washington Post that Dodd's proposed makeover of the Federal Reserve System is "kind of the sum of all fears of regional bank presidents."
"If the regional banks lose their employment base and lose their contact with smaller banks, they're going to have less influence over monetary policy, as well," O'Driscoll said. "Over time, it will tend to centralize the influence of New York and Washington relative to the regional banks."