Financial Regulatory Forum

U.S. House OKs Fed audit provision, eyes on Senate

By Reuters Staff
December 12, 2009

By Mark Felsenthal

WASHINGTON, Dec 11 (Reuters) – The U.S. Federal Reserve on Friday lost the opening round in a battle to defeat a congressional plan to subject its interest rate decisions to audits, and will now look for a comeback victory when the Senate starts to move on regulatory reforms.

The House of Representatives delivered the loss with a 223-202 vote in favor of a revamp of financial regulation that, among other things, would pare Fed supervision over financial firms and its capacity to provide emergency help to banks, while allowing audits of monetary policy by a watchdog agency.

Fed Chairman Ben Bernanke and other top officials for weeks had argued the audit provision would result in a costly impression that the central bank’s rate decisions could be swayed by politics. They warned this could lead financial markets to fear inflationary policies, which in turn could drive up borrowing costs and undermine the economy.

The Fed will have ample opportunity to get allies on Capitol Hill to defeat the audit measure.

Senate Banking Committee Chairman Christopher Dodd has proposed a bill that would also open the Fed’s emergency lending to audits, but not its interest rate decisions.

The proposed overhaul is a backlash against a laissez-faire regulatory climate that is widely blamed for laying the ground for the financial crisis that plunged the U.S. and global economies into a deep recession that is only slowly easing.

To respond to the crisis, the Fed took unprecedented actions that have pumped more than $1 trillion into the financial system, raising concerns the central bank’s far-reaching powers were putting taxpayer money at risk.

“Central banks have done such extraordinary things, it’s only natural for people to say, wow, given all that’s had be done, we should … have clear transparency,” said Rich Spillenkothen, a former Fed regulatory official who is now with Deloitte & Touche.

“At the same time, anything that does undermine the credibility or independence of the central bank is a big mistake,” he warned.

Representative Barney Frank of Massachusetts, the powerful chairman of the House Financial Services Committee who had done the heavy lifting to get a regulatory reform bill through the House, had opposed the measure but realized the politics of the moment would carry the day.

“I think it could give the perception that monetary policy is not going to be independent and that would have an inflationary effect in and of itself,” Frank told CNBC television shortly after the vote.

LONG PROCESS AHEAD

Whatever financial reforms the Senate may eventually back would have to be reconciled with the House bill before President Barack Obama can sign anything into law, a process that is expected to run well into next year.

The House measure would also strip the Fed of some of its consumer protection responsibilities and create a new government agency to take over those functions.

It would make the Fed part of an inter-agency Financial Services Oversight Council chaired by the Treasury secretary that would keep watch over the soundness of the entire financial system.

The Obama administration had argued for making the Fed the main systemic risk regulator on its own.

The bill also proposes new limits on the central bank’s “lender of last resort” power by restricting its authority to lend money to firms other than banks in “unusual and exigent circumstances.”

In addition, it would set a $4 trillion cap on Fed emergency lending, a provision that drew little scrutiny as the bill worked its way to the House floor.

Dodd’s bill in the Senate also contains provisions the Fed would prefer to see disappear.

The Senate bill, which has yet to be considered even at the committee level, would strip the Fed of its bank oversight authority altogether and instead create a new Financial Institutions Regulatory Administration. The Fed chairman would be on the board of that agency.

“These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States,” Bernanke said in a rare newspaper opinion piece in late November.

The Senate measure would also increase Washington control over the boards of regional Federal Reserve banks. The president would name the chair of those boards, who would be subject to Senate confirmation.

Three of the members of each regional Fed bank board would be selected by the central bank’s Washington-based Board of Governors, a group of Senate-confirmed presidential appointees. Those regional board members are currently picked by local bankers.

For details on Fed-related provisions of both bills, please click here.

(Editing by Leslie Adler)

((mark.felsenthal@thomsonreuters.com; +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net))

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