In one of the most thought-provoking comments of
the year, a NY Fed official, citing the penumbra doctrine advanced by Justice
William O. Douglas in the Griswold case,
said that financial stability should be part of the Fed’s mandate in addition
to price stability and maximizing employment.
Citing Justice Douglas,
N.Y. Fed Executive Vice President and General Counsel Thomas Baxter found a
third mandate to promote financial stability in a penumbra to the
Federal Reserve Act and in express provisions in the Dodd-Frank Act. In remarks
at recent E.U. conference, he noted that the legal basis for deriving implied powers from the penumbra of other
express powers is best seen in the opinion of Justice Douglas in Griswold v. Connecticut, where he
reasoned that the First Amendment has a penumbra where privacy is protected
from governmental intrusion, in particular the right of association.
Similarly,
the Federal Reserve Act has a penumbra where the Federal Reserve derives its
mandate to ensure financial stability, such that it may achieve the Section 2A
dual mandate of price stability and maximum employment. The key point
here is that the Federal Reserve’s financial stability mandate is derived from
what lies in the penumbra, reasoned the Fed official, not from any express
reference to financial stability in the Federal Reserve Act itself.
And, financial
stability is an open and obvious topic of Title 1 of the Dodd-Frank Act, whose most
consequential provisions is Section 165, which empowers the Board of Governors
to develop enhanced prudential standards for systemically important financial
institutions. In a provision directly
affecting central bank powers, Congress instructs the Federal Reserve to
develop prudential standards to prevent or mitigate risks to financial
stability that could arise from the
material financial distress or failure, or ongoing activities, of large
interconnected financial institutions.
There
are other provisions of the Dodd-Frank Act granting new powers to the Federal
Reserve with respect to financial stability, noted the NY Fed official. One obvious
provision is Section 604, which amends the Bank Holding Company Act to direct
the Federal Reserve to consider, when it evaluates an application for approval
of a proposed acquisition, merger, or consolidation, whether it would result in
greater or more concentrated risks to the stability of the United States banking or financial
system.