Fed asks whether it is too close to banks
The Federal Reserve board is conducting a major review of how the regulator and its reserve banks supervise large financial institutions, amid mounting criticism that it is to close to and too lenient with the Wall Street groups it oversees. News of the inquiry, announced on Thursday, came a day before two top officials, Fed Governor Dan Tarullo and New York Fed president William Dudley, are due to testify in separate Senate hearings into regulatory oversight practices.
“One subset of this system-wide inquiry will analyse regulatory capture,” Mr Dudley said in written testimony that will be presented at Friday’s hearing. The Fed said it is examining whether board members receive the information they need to make sound oversight decisions, and whether it has adequate methods for those officials to receive information needed to resolve differing views about bank supervision.
The Fed also asked its inspector general, Mark Bialek, to examine those issues, according to a Monday letter from Fed general counsel Scott Alvarez and the head of banking supervision, Michael Gibson. “Are there channels, both within and outside the immediate chain of command, for decision makers to be aware of divergent views about material issues regarding large banking organisations addressed by the members of the dedicated examination team?” the letter asked.
The Fed board review, which was initiated last week, involves the agency in addition to the reserve banks that are responsible for overseeing the largest financial institutions. They include Boston, Chicago, New York, Richmond and San Francisco. The Fed and the New York Fed have been criticised for not being tough enough on the banks they supervise, and have suffered from a string of negative headlines in recent months.
On Wednesday, Goldman Sachs said it had fired an investment banker who allegedly accessed confidential information from the New York Fed, his former employer. The bank also dismissed his supervisor, a senior banker in the financial institutions group, which advises other banks on deals. Last month, the Fed’s inspector general found that the agency had identified risks in the JPMorgan unit that lost more than $6bn in what was known as the “London Whale” trading incident. But the Fed did not act on those concerns or share the information with the Office of the Comptroller of the Currency, the primary regulator for JPMorgan, the Fed’s watchdog said.
In September, secret recordings of New York Fed officials declining to press Goldman about a 2012 deal were made public, which led Senator Sherrod Brown to call Friday’s hearing.
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The recordings were made by former New York Fed bank examiner Carmen Segarra, who filed a lawsuit against the agency in October 2013 claiming she was fired after she criticised Goldman on its handling of conflict of interest matters. The lawsuit was dismissed by a US federal judge in April. Earlier this week, Senator Jack Reed introduced a bill that would require Senate confirmation for future heads of the New York Fed. Currently, the NY Fed board chooses the person for that position.
NOTE: The article fails to mention that Bill Dudley, NY Fed President, is a former employee of Goldman-Sachs. That seems relevant, given the article.