The Federal Reserve's Expanding Regulator Umbrella

April 10, 2013

Despite its lackluster performance in preventing the 2007 crisis, Congress delegated more powers to the Federal Reserve, the nation's century-old central bank known for its monetary policy responsibilities. As a result, the Federal Reserve now has too much regulatory power, say Hester Peirce and Robert Greene of the Mercatus Center.

  • The Federal Reserve System consists of the seven-member Board of Governors, supported by a staff of 2,400, and 12 regional Federal Reserve Banks with their own boards of directors and a combined staff of more than 15,500.
  • The governors are presidentially nominated and Senate-confirmed for 14-year terms and now write rules, impose recordkeeping requirements, approve of activities, conduct examinations and bring enforcement actions upon an increasing number of companies.
  • The Board supervises 828 state-chartered commercial banks and oversees more than 5,341 bank holding companies.

Under Dodd-Frank, the financial reform law signed into law in July of 2010, companies with more than $50 billion must meet stringent standards that include risk-based capital requirements, risk-management requirements, a resolution plan and credit exposure report requirements.

  • Under Dodd-Frank, the Federal Reserve Board now has authority over the whole holding company structure, even subsidiaries that have another regulator like the Securities and Exchange Commission or the Commodity Futures Trading Commission.
  • Dodd-Frank also eliminated the Office of Thrift Supervision, splitting the responsibility for regulating savings and loan holding companies between the Fed and the Federal Deposit Insurance Corporation.
  • The Board now also has supervision over investment bank holding companies that own or control a broker or dealer and are not affiliated with a bank, as well as designative nonbank financial companies and recipients of Troubled Asset Relief Program funds.

Dodd-Frank also empowers the Financial Stability Oversight Council to designate companies as systemically important, which brings them under the Board's supervision. The Board has enhanced authority to impose regulations on large foreign banking organizations and a broad mandate to consider risk on the financial system.

With all of these increased regulatory responsibilities, the Federal Reserve now performs a greater role in the financial markets than before. The effectiveness of this centralized regulatory power should be examined to ensure optimal policy outcomes.

Source: Hester Peirce and Robert Greene, "The Federal Reserve's Expanding Regulatory Umbrella," Mercatus Center, April 3, 2013.

 

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