Senate financial bill appears likely to keep Fed as regulator of big banks

By Brady Dennis
Washington Post Staff Writer
Wednesday, March 10, 2010

Key members of the Senate banking committee are coalescing around legislation that would strip the Federal Reserve of much of its regulatory authority but would leave the central bank with oversight of the nation's largest banks, according to aides familiar with the ongoing negotiations.

Under the plan, the Fed would continue to supervise only 23 bank-holding companies with assets exceeding $100 billion. Supervision of the nearly 5,000 banks below that threshold would fall largely to a proposed new regulator to be created by merging the Office of Thrift Supervision and the Office of the Comptroller of the Currency, aides said.

In addition, the Federal Deposit Insurance Corp. would take over regulation of more than 800 state-chartered banks that currently are part of the Federal Reserve System, according to the aides, who spoke on condition of anonymity because the talks are still ongoing and the provisions still could change.

Banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) and freshman Republican Sen. Bob Corker (R-Tenn.) have been negotiating for weeks the particulars of a sweeping overhaul of the nation's financial regulatory system and hope to have a draft within the next week.

Dodd's initial draft of the bill last fall stripped the Fed entirely of its regulatory authority, leaving the central bank with the sole purpose of overseeing the nation's monetary policy. The Fed's prospects for retaining any oversight duties seemed uncertain at best, as committee members on both sides of the aisle heaped criticism on the agency for its failures in the lead-up to the financial crisis.

But in recent weeks, that criticism seems to have softened, and key lawmakers have concluded that the Fed should be entrusted with at least some regulatory responsibilities.

The Obama administration, Fed Chairman Ben S. Bernanke and banking industry officials have argued that the Fed should continue in its role as a bank supervisor. Just last week, a group of high-profile industry groups, including the American Bankers Association, the Financial Services Roundtable and the Independent Community Bankers of America, argued in a letter to committee members that stripping the Fed of supervisory authority would lead to a weaker regulatory system. They pushed lawmakers to let the Fed continue to oversee both large and small firms.

"The Federal Reserve needs a broader regulatory focus to ensure that for both its central bank and regulatory functions it has a clear view of banks of all sizes, from all regions, and from differing types of communities," they wrote.

Senate aides said that the Fed's regional presidents also have been lobbying to retain supervision of banks under their jurisdiction, arguing it is central to devising successful monetary policy. But some lawmakers remain skeptical. "It has a lot to do with the fact that they would lose size and their reason for being," one aide said.

Oddly enough, the same senators weighing whether to curtail the Fed's supervisory powers are leaning toward putting a new consumer-protection regulator inside the agency in a compromise over one of the most divisive elements of the financial reform debate.

Democrats and the administration have pushed for a free-standing consumer-protection agency, but Senate Republicans were willing only to place the new regulator inside an existing agency. Democrats objected to putting it under a proposed national bank supervisor, while Republicans objected to placing it inside the Treasury Department. The Fed emerged as the last remaining option.

Key issues about the consumer regulator remain unresolved, such as whether it could impose rules over the objections of banking regulators. Dodd and Corker also are negotiating how broadly the rules would apply to financial institutions other than banks.

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