Fed bank regulation

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Inside a Fed regional examiner

He has a Ph.D. And a beard. It is hard not to think of Ben Bernanke as the embodiment of the Federal Reserve, wisely and nobly protecting the nation's financial security.

Then there are the people who really do the work: An anonymous corps of bank examiners who hump across the country like traveling salesmen, inspecting bank records in lonely conference rooms.

Some of these examiners are among the people who would get new power under the plan proposed by Sen. Christopher Dodd as he embarks on a great reshuffling of U.S. financial regulation. The bill he introduced Monday would give the Fed supervision over the country's largest financial institutions, while cutting its oversight of smaller banks.

With 198 bank failures since 2007, some in Congress are still skeptical about whether the Fed is up to the task. Why didn't the Fed's regional examiners, who were literally working inside the nation's rotting banking system, sound a stronger warning about bad real-estate lending? Citigroup, National City, Wachovia, and dozens of smaller banks all got into serious trouble—on the Fed's watch.

Last Friday, I visited bank examiners at the Federal Reserve Bank of Philadelphia, hoping to better understand the people securing the front lines of our broken financial system. These examiners are responsible for overseeing 130 banks in asset size from $50 million to $150 billion. Their salaries range from about $40,000 to $140,000.

They were people like 43-year-old James Corkery, who has served as an examiner for 20 years off and on, plying the Philly Fed's territory from Delaware to central Pennsylvania.

The day-to-day of bank examinations—poring over bank loan portfolios, assembling spreadsheets of bank asset quality—seemed to be in Mr. Corkery's blood. He said he spent 60 nights on the road last year, conducting on-site visits at community banks. "It's my nature to take apart things," he said from a conference room amid a warren of putty-colored metal walls and cubicles.

There was H. Robert Tillman, whose thick, gray hair suggests Bernanke-ian wisdom. Mr. Tillman spent 14 years as an in-house attorney at New Jersey banks, and said he loved his work, especially investigating money laundering. It has "an impact on the economy and the strength of society," he said.

And yet for all their dedication, the examiners appeared to be working with a very narrow mandate.

As Mr. Corkery pointed out, examiners are "not auditors." Instead they serve more as government-paid consultants, helping banks identify portfolio risks and correct them. Even after the greatest banking crisis in generations, Mr. Corkery said he is "not sure there have been any radical changes" in how he does his job.

Michael E. Collins, the Philadelphia Fed official in charge of supervision, acknowledged that the Fed system has to change, taking into account the health of the broader banking system, rather than a bank-by bank analysis. "The supervision of tomorrow has to be vastly different than the supervision of today," he said.

But how will the Fed change? Only two of the 12 regional Fed presidents have direct experience as a field examiner: New York's William Dudley and Kansas City's Thomas Hoenig.

Examiners long had been viewed as second-class citizens to the Brahmins shaping monetary policy at the Fed, said Mark Williams a former Fed examiner from 1991 and 1993 and now a professor at Boston University.

"At the end of day, examiners are taking cues from the people above them," said Kevin Fitzsimmons, who worked as an examiner in the mid 1990s and is now a banking analyst at Sandler O'Neill & Partners.

Nor are they given the technological tools to keep pace with the banks they are regulating, Mr. Williams said. "They're not proactive. The Fed has a peashooter to the AK-47s of Wall Street."

With all the Fed's brainpower and reputation, it is easy to see why Sen. Dodd views the central bank as the best place for improving safety of our banks.

But from a brief visit inside, it is clear that reform must begin at the Fed itself.

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