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Bernanke presses case for Federal Reserve oversight of small banks

By Neil Irwin
Washington Post Staff Writer
Sunday, March 21, 2010; A04

The Fed to Congress: Don't take away our small banks.

Top Federal Reserve officials are waging a public campaign to convince lawmakers that their long-standing authority to regulate banks around the country -- including small and midsize ones -- is integral to keeping the central bank attuned what is going on across the U.S. economy.

Chairman Ben S. Bernanke articulated that message Saturday morning in a speech to the Independent Community Bankers of America in which he argued that the Fed is better able to monitor the U.S. economy because of its role overseeing 5,000 bank holding companies and 850 state-chartered banks around the country.

Sen. Christopher J. Dodd (D-Conn.) has proposed stripping the central bank of those responsibilities in financial reform legislation that the Senate banking committee will take up Monday. The proposal would leave the Fed as the supervisor of only the three dozen or so largest banks.

Dodd and others in Congress have argued that the Fed should be focusing more narrowly on managing the nation's monetary policy and on ensuring the stability of the financial system overall -- and are particularly eager for the central bank to face consequences for its mistakes earlier in the decade that contributed to the financial crisis.

But Bernanke and other Fed leaders are fighting the attempt to strip them of authority over small banks. Increasingly, they're turning away from the quiet persuasion of lawmakers -- the Fed's typical approach -- and toward making their case openly and vigorously.

The data used by the Fed to analyze economic conditions "often mask the diversity of the U.S. economy" and are backward-looking, Bernanke said in his speech Saturday. "In contrast," he said, "the grass-roots information that we obtain from community bankers and the other community and business leaders who serve as Reserve Bank directors provides a forward-looking perspective on economic developments and concerns, as well as a level of detail and qualitative insight that is often lost in the aggregate numbers."

Indeed, he described the Fed's role as supervisor of all types of institutions as crucial ballast in keeping it from being too focused on the interests of Wall Street firms and the views of officials in Washington. The Fed's supervision of banks is carried out by 12 regional banks around the country whose presidents also have a role setting the nation's monetary policy.

"Why was America's central bank given this unique structure?" Bernanke said. "The reason was to provide legitimacy and a broad geographic presence across the nation for an institution that often has to make difficult decisions. Over time, this structure has provided the Federal Reserve with grass-roots connections, local insights and diverse perspectives that few other federal institutions enjoy."

Besides Bernanke, presidents of some reserve banks are increasingly vocal about the possibility of losing their role overseeing small and midsize banks.

"It seems kind of strange to me that even in this crisis where we have heard complaints that the Fed was too attentive to Wall Street and so on that we are moving toward a system to concentrate the interests of the central bank on Washington and Wall Street," Charles Plosser, Philadelphia Fed president, said in an interview. "That seems like the wrong way to go to me, and would not necessarily be in the best interest of monetary policy, or of responding to crises, or in the spirit of decentralized robust decision making."

The congressional efforts to focus the Fed only on overseeing the largest banks, Plosser said, would be "a dangerous path to go on and would not be good for Main Street or the Fed's ability to be independent enough to make hard decisions when the time comes to raise rates when it may be politically unpopular."

Also articulating the Fed's case for keeping bank supervision this week was Thomas Hoenig, president of the Kansas City Fed.

"Stripping the Federal Reserve of its responsibility for supervising regional and community banks and bank holding companies should be unacceptable to anyone who cares about equity in the nation's banking system, largest to smallest bank, and the nation's regional and local economies," Hoenig said at an American Bankers Association conference.

The Fed has a key ally in the banks themselves; the Independent Community Bankers of America has argued that the Fed should remain the supervisor of large and small banks.

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