Bernanke’s Fed fight

WASHINGTON – Federal Reserve Chairman Ben S. Bernanke told lawmakers Wednesday that regulatory failures by the central bank helped trigger the financial crisis, but that doesn’t mean they should strip the agency of much or all of its oversight of individual banks.

The Fed has been under intense fire for not heading off the meltdown of the housing and financial markets, particularly in Congress where lawmakers are considering a sweeping overhaul of financial regulations that would curtail the central bank’s role in bank supervision.

Senate Banking Chairman Christopher Dodd, D-Conn., who has called the Fed’s regulation of banks an “abysmal failure,” proposed Monday taking away its oversight of all but about three dozen of the nation’s largest banks.

Bernanke fought back Wednesday in his first public comments about Dodd’s proposal.

The Fed is working to improve its oversight of the 6,000 small and large banks that it regulates, Bernanke said. Stripping the Fed of a major part of that regulatory role, he said, would deprive it of important information about the state of the financial system and the economy that is necessary to set monetary policy.

“We are quite concerned by proposals to make the Fed a regulator only of the biggest banks,” Bernanke told the House Financial Services Committee. “It makes us essentially the too-big-to-fail regulator. We don’t want that responsibility. We want to have a connection to Main Street as well as to Wall Street.”

Former Federal Reserve Chairman Paul Volcker, now an economic adviser to President Barack Obama, backed Bernanke. He told the committee it would be a “really grievous mistake” to remove the Fed from its role in overall bank regulation.

But the Fed is not popular on Capitol Hill right now.

It has been criticized for waiting until 2008 – 14 years after Congress granted it authority – to enact rules on the risky subprime mortgages that wrecked the housing market.

And many lawmakers are angry about the Fed’s bailouts of investment banker Bear Stearns & Co. Inc. and giant insurer American International Group Inc., as well as the trillions of dollars it has pumped into the economy to ease the credit crisis.

House Republicans have proposed taking away all of the Fed’s oversight of banks as part of their financial regulatory overhaul so it can focus on monetary policy.

Under the House-passed financial regulatory overhaul and Dodd’s proposal, the Fed would gain new authority to regulate huge financial institutions that are not banks.

The Fed now oversees about 5,000 bank holding companies and about 850 state-chartered banks that are part of the Federal Reserve System. There are about 8,000 banks in the U.S. overall.

The House bill retains that oversight. But Dodd has proposed stripping the Fed of regulatory authority over all but the largest bank holding companies – those with $50 billion or more in assets.

Under Dodd’s plan, regulation of the other banks under Fed oversight would be shifted to the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.