Monday, March 08, 2010

Securities and Banking Industries Urge Senate to Retain Fed Regulatory Powers

The securities and banking industries believe that the Federal Reserve Board should continue to play a regulatory role in the new financial regulatory system being crafted by reform legislation. In a letter to Senate Banking Committee Chair Chris Dodd and Ranking Member Richard Shelby, industry groups asked that the Senate not separate the Fed’s monetary policy role from the central bank’s financial regulation function. The letter was signed by the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Roundtable.

While recognizing that the primary responsibility of the Fed is monetary policy, the industry groups said that it would be a mistake to limit the Federal Reserve to regulation of only large, complex institutions headquartered in major financial centers. The Fed needs a broader regulatory focus to ensure that for both its central bank and regulatory functions it has a clear view of banks of all sizes, from all regions, and from differing types of communities, emphasized the groups.

In addition, in its basic role as a central bank the Fed acts as lender of last resort to stem liquidity crises that can arise from or feed financial panic. This is not support to be used to prop up failing institutions, noted the groups, but rather a means of helping solvent institutions cope with the danger of bank runs or other exceptional liquidity demands. That is why the Federal Reserve requires strong collateral for borrowing at the discount window.

The industry groups also observed that the institutional information and insights obtained by the Fed through its regulatory activities are essential to the proper conduct of its lender of last resort responsibilities and its understanding of the needs and activities of the financial institutions that might call upon Fed facilities. Again, this experience must come through supervision of banks of all sizes and in all regions.