00278 - [A0751124]
Federal Supervision of State and National Banks Body of Report. OCG-77-1; B-114831; B-118535; Vol. II: Main B-168904# January 31, 1977. 1 vol. (various pagings).
Report to the Congress; by Elmer B. Staats, Comptroller General.
Issue Area: Federal Regulatory Activities (30C0); Accounting and Financial Reporting (2800). Contact: Office of the Comptroller General. Budget Function: Miscellaneous: Financial Management and Information Systems (1002); General government: Central Fiscal Operations (803).
Organization Concerned: Federal Deposit Insurance Corp.; Federal Reserve System; Department of the Treasury; Office of the Comptroller of the Currency. Authority: National Banking Act (12 U.S.C. 21-27). Federal Deposit Insurance Act (12 U.S.i. 1816).
PURPOSE OF THIS STUDY
The Congress is concerned with the soundness of the commercial banking system. In the past 3 years, several large U.S. banks have failed. The public has become aware that a number of major banks are on supervisoryr agencies' lists of problem banks 1/. The supervisory agencies' power, capability. and independence to pLoperly supervise the banks are being questioned. In early 1976, several cor7ressional committees asked us to evaluate the effectiveness of the supervisory efforts of the three Federal agencies involved:
- Federal Deposit Insurance Corporation (FDIC);
- Federal Reserve System (FRS); and
- Office of the Comptroller of the Currency (OCC), Department of tne Treasury.
Specifically, the study was requested by the Chairmen of
- -- the House Committee on Banking, Currency and Housing;
- -- the Domestic Monetary Policy Subcommittee, House Committee on Banking, Currency and Housing;
- -- the Financial Institutions Supervision, Regulation and Insurance Subcommittee, House Committee on Banking, Currency and Housing;
- -- the Commerce, Consumer, and Monetary Affairs Subcommittee, House Committee on Government Operations; and
- -- the Senate Committee on Banking, Housing and Urban Affairs.
Federal Reserve policy audit legislation ‘gutted,’ Paul says
- Source: Federal Reserve Policy Audit Legislation ‘Gutted,’ Paul Says Bloomberg, October 30, 2009
"Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.
The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.
“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”
The Fed, led by Chairman Ben S. Bernanke, has come under greater congressional scrutiny while attempting to end the financial crisis by bailing out financial firms and more than doubling its balance sheet to $2.16 trillion in the past year. The central bank is also buying $1.25 trillion of securities tied to home loans.
Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.
Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.
Paul said he intends to introduce an amendment to the bill when it comes to the House floor for a vote restoring the legislation’s original language.
Representative Barney Frank, a Democrat from Massachusetts and chairman of the committee, said in interview that he intends to ensure legislation would provide a time lag between FOMC actions and the reporting of them.
Such a provision would “lessen the market impact,” he said on Oct. 20. “The importance is to see that there are no abuses and to judge what they did.”
The legislation will probably be included in a broader Democratic package of financial-regulation changes in the House, Frank said.
To contact the reporter on this story: Bob Ivry in Washington at email@example.com.
Fed as prop for housing/mortgage industry
- Source: Bernanke Housing Gamble May Bring Pressure to Extend Fed Aid Bloomberg, November 3, 2009
"Federal Reserve Chairman Ben S. Bernanke is gambling that come March, he can stop the purchases of mortgage-backed securities that have propped up the U.S. housing market. Congress may have other ideas.
The central bank says it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold. Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.
Bernanke, who convenes a meeting of the Federal Open Market Committee today, is counting on private investors to fill the void left by the Fed when its purchases end. If he’s wrong, he may come under pressure from politicians to maintain support for housing or even extend credit programs for small businesses and consumers. That would threaten the Fed’s ability to conduct an independent monetary policy.
“The nightmare scenario for the Fed would be to see them try to sell their mortgage portfolio, and Congress steps in and tries to stop it on the grounds that the housing market hasn’t fully recovered,” said Ethan Harris, head of North American Economics at Bank of America-Merrill Lynch in New York. “The attempts to influence the Fed in the exit strategy will be pretty strong.”
The Fed chairman has already come under pressure from lawmakers including Senate Banking Committee Chairman Christopher Dodd of Connecticut and Representative Paul Kanjorski of Pennsylvania, both Democrats, to aid car companies and provide more credit to commercial real estate.
“Whenever any sector has perceived difficulties, Congress may ask the Fed to invent a new program,” said William Poole, a former president of the St. Louis Fed who is now a senior fellow at the Cato Institute, a Washington-based policy research group.
The FOMC will release a monetary policy statement around 2:15 p.m. tomorrow in Washington. A Labor Department report two days later may show the jobless rate rose to 9.9 percent in October, even as the economy returned to growth.
Fed officials say purchases of housing debt have helped lower borrowing costs, boosting the part of the economy that was at the epicenter of the economic crisis. The average rate on a 30-year mortgage was 5.03 percent last week, down from 6.46 percent a year earlier, according to mortgage company Freddie Mac.
Rates on 30-year mortgages could be a full percentage point higher by March as the economy strengthens and the Fed stops its purchases, says Nicholas Strand, a mortgage-backed securities strategist at Barclays Capital Inc. in New York.
Home Sales Surge
Sales of new homes unexpectedly fell in September as the end of an $8,000 tax credit for first-time homebuyers approached. Concern the housing recovery may falter prompted Senate Democrats to agree to extend the credit and allow benefits for some people who already own homes.
“There is a question whether the housing market can survive when the fiscal props are pulled out,” Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview.
The central bank is already the biggest buyer of mortgage- backed securities sold by Fannie Mae and Freddie Mac, with purchases exceeding new issuance by the two companies in September, according to the Mortgage Bankers Association.
“When the Federal Reserve stops buying mortgages, is there private capital to substitute?” Laurence Fink, chairman and chief executive officer of New York-based asset-management firm BlackRock Inc., said in an interview with the Financial Times’ Martin Wolf broadcast on Bloomberg Television Oct. 28. “At the moment, it is not certain.”
Purchases of mortgage securities are part of the unprecedented expansion of the Fed’s powers under Bernanke, a 55-year-old Princeton University economist and self-described “Great Depression buff” who took the helm in 2006.
The Fed chairman told the House Financial Services Committee July 21 that “aggressive actions” by central bankers averted “the collapse of the global financial system.”
Representative Ron Paul, saying the Fed has “operated without sufficient scrutiny or oversight,” is sponsoring a bill that would open monetary policy to audits by Congress. The Texas Republican’s bill has more than 300 co-sponsors.
“If the economy is performing poorly, it will be difficult to get back to independence in monetary policy,” says Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Fed’s Division of Monetary Affairs.
The Fed has already come under pressure to provide industrial finance twice in the past year.
Aid to Automakers
Last December, when legislators were considering bailouts for General Motors Corp. and Chrysler LLC, Dodd asked Bernanke in a letter “whether there is anything in your statute that prevents you from lending to any of these domestic auto- manufacturing companies.”
Dodd was rebuffed by Bernanke, who said “questions of industrial policy are best resolved by Congress.”
In July, Kanjorski and 41 other members of Congress asked Bernanke to help support the commercial mortgage-backed securities market by extending the Fed’s Term Asset-Backed Securities Loan Facility through the end of 2010.
The Fed approved an extension until March of 2010 for existing CMBS deals and until June 2010 for new ones. Fed officials said they were already considering the extension when they received Kanjorski’s letter.
Paul Krugman, the Nobel-prize winning Princeton University economist, said Bernanke had little alternative to expanding the Fed’s balance sheet.
“I’d love to see the Fed with a perfectly clean balance sheet,” Krugman told reporters at a news conference in Buenos Aires on Oct. 27. “I’m sure Bernanke would like that as well. But the problem is in housing. The Fed probably should continue purchasing as long as we’re in this situation.”
Fed’s regional chiefs ‘fight’ for monetary policy independence
- Source: Fed’s Regional Chiefs ‘Fight’ for Monetary Policy Independence Bloomberg, October 30, 2009
"Federal Reserve regional bank presidents are trying to ward off congressional efforts to weaken their clout, saying the moves may jeopardize monetary policy independence.
Kansas City Fed president Thomas Hoenig is circulating a book titled “The Balance of Power: The Political Fight for an Independent Central Bank.” Charles Plosser of Philadelphia said on Sept. 29, “we must preserve” the Fed’s structure.
Senate Banking Committee Chairman Christopher Dodd and Barney Frank, his House counterpart, have said they may change how Fed presidents are chosen or curb their power. Presidents aren’t appointed by Congress and are partly selected by banks, which lawmakers say share blame for the financial crisis. The danger is that Congress, by altering the selection process, may gain enough influence over monetary policy to thwart Fed efforts to tighten credit in coming years and keep prices from surging.
“If Congress interferes with the Fed’s ability to do what has to be done, it could have major negative effects on the economy through its impact on inflation,” said former Fed Governor Lyle Gramley, 82. The threat to central bank autonomy “looks to be the worst that I can recall in my lifetime.”
U.S. stocks, bonds and the dollar would collapse if investors perceive Congress violating the independence of the policy-setting Federal Open Market Committee, said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC.
The Fed is run by a seven-member Board of Governors in Washington, headed by Chairman Ben S. Bernanke, and 12 banks representing different regions. The governors serve 14-year terms, and there are two vacancies on the board.
The regional Fed presidents, unlike the governors, aren’t selected by politicians in Washington. Governors are nominated by the president and confirmed by the Senate. By contrast, the Fed bank chiefs are nominated by private boards of directors, partly composed of commercial bankers, and confirmed by the Washington-based governors.
The governors and the New York Fed president have permanent votes on the Federal Open Market Committee, which meets about every six weeks to set the benchmark interest rate. The other 11 district-bank presidents vote every two or three years on a rotating basis.
Congressional scrutiny follows criticism that the Fed failed to adequately supervise banks and, after the financial crisis erupted, exposed taxpayers to losses by bailing out American International Group Inc. and other firms.
The central bank has also come under fire for granting a waiver allowing a former Goldman Sachs Group Inc. chairman to remain on the board of the New York Fed after the company opted to come under Fed oversight.
“The antagonism in the Congress toward the Fed is larger than I can recall,” said Gramley, who joined the Kansas City Fed as an economist in 1955 and is now senior economic adviser to New York-based Soleil Securities Corp.
Dodd, a Democrat from Connecticut, and Senator Richard Shelby of Alabama, the banking committee’s top Republican, plan to consider stripping commercial banks’ power to appoint regional Fed presidents as part of an overhaul of regulation.
Allowing banks to select their supervisors is “absolutely backwards,” Dodd said this month, without mentioning Fed interest-rate policy.
“There is an inherent conflict of interest in the selection of reserve presidents,” Shelby said in an Oct. 14 interview.
Commercial banks currently elect two-thirds of regional- bank directors, who choose presidents of the regional banks. The Fed’s Washington-based governors pick the other third of the directors in each regional bank.
“The reason Congress set up a structure that we have was a combination of depoliticizing monetary policymaking and decentralizing it at the same time,” Plosser, 61, said in an interview.
The structure disperses some power over monetary policy to banks and other institutions nationwide, checking the influence of Washington politicians and big Wall Street firms, he said. St. Louis Fed President James Bullard called the arrangement “a considerable asset.”
“One of the ideas about setting it up this way is you would be able to survive when you had some populist backlash because you do have some roots all around the country, and you are getting input from all around the country on monetary policy,” Bullard said in an Oct. 12 interview.
AFL-CIO President Richard Trumka, testifying yesterday to the House Financial Services Committee, called on legislators to alter the selection process for regional bank presidents as part of any strengthening of the central bank’s regulatory powers.
The Fed’s regional presidents “should not be setting public policy,” Frank said yesterday in response to Trumka. Frank, a Massachusetts Democrat and the committee chairman, said in an Oct. 7 interview he wants to review the “whole governance structure” of the Fed next year.
In April, Dodd and Shelby won passage, by a 96-2 vote, of a non-binding resolution calling in part for an “evaluation of the appropriate number and the associated costs” of Fed district banks.
Representative Ron Paul, a Texas Republican who has called for abolishing the Fed, has gained 307 co-sponsors for legislation to require an audit of the central bank, including monetary policy. Bernanke and other Fed officials oppose the bill.
The congressional proposals are the biggest threat to the Fed’s independence since its wrangle with President Harry Truman, who in 1951 summoned the FOMC to the White House to voice opposition to higher interest rates, Gramley said. The episode ended with the Fed winning the right to conduct monetary policy without Treasury approval for the first time since 1934, according to historian Allan Meltzer.
Some legislators want to “make the institution more political, and I think that’s terribly unfortunate,” Hoenig, 63, Kansas City’s president since 1991, said in an Oct. 9 interview.
“The structure is and was carefully constructed by its founders,” he said. “There is a grass-roots input, there is an ability to bring interested citizens, apolitical, who care and who are not on a political agenda, into the process.”
To contact the reporter on this story: Scott Lanman in Washington at firstname.lastname@example.org.
- Fed Made Taxpayers Junk-Bond Buyers Without Congress Knowing Bloomberg, July 1, 2010
- Are the Fed, the Congress and the Primary Dealers an Alliance of Convenience? IRA Newsletter, Oct 20, 2009