On the eve of a Senate hearing today into whether the Federal Reserve has been “captured” by the institutions it is supposed to regulate, the Fed announced a broad review of its supervision of the largest banks, and a top official acknowledged there’s a danger that examiners could be too easy on them.
“We understand the risks of doing our job poorly and of becoming too close” to banks, New York Fed President William C. Dudley said in testimony to a Senate panel. “We cannot catch or correct every error by a financial institution, and we sometimes make mistakes.”
The hearing was prompted by allegations leveled against the New York Fed by a former supervisor who said her colleagues were too deferential to Goldman Sachs Group Inc., the Wall Street bank where Dudley once worked. Fresh reports this week of improper ties between employees of the two institutions are providing ammunition to congressional critics, some of whom want to limit the central bank’s authority and autonomy.
“More than six years ago, when regulators got too cozy with the banks they were regulating, we saw the cost in lost jobs, retirement savings, and homes,” Sherrod Brown, the Ohio Democrat who will lead today’s hearing, said in a reference to the financial crisis. “It’s past time that the Federal Reserve shows -- with actions, not words -- that it will protect consumers rather than Wall Street.”
The Fed Board said yesterday it had asked Inspector General Mark Bialek in a Nov. 17 letter to review examinations of bank holding companies with assets exceeding $50 billion.
The Fed asked Bialek to determine if examinations obtain “all material information” and whether there are ways “for decision-makers to be aware of divergent views about material issues regarding large banking organizations.”
“The Fed review of how it supervises banks is very serious and very real,” said Joseph Engelhard, a former Treasury Department official who is now senior vice president at Washington-based consultant Capital Alpha Partners LLC.
The watchdog will also examine whether supervisors at the 12 regional reserve banks are aware of disagreements on their teams.
That’s the issue that led to today’s hearing, which Brown called in response to secret recordings made by Carmen Segarra, a New York Fed examiner posted at Goldman Sachs who said she was fired because she refused to go easy on the firm, a charge the New York Fed has denied. Segarra attended today’s hearing.
The Segarra allegations are “part of a much bigger issue than simply a dispute with the New York Fed,” said Peter J. Wallison, a senior fellow in financial policy studies at the American Enterprise Institute in Washington.
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