A massive shake-up by the Fed following the financial crisis in 2008 has resulted in the Federal Reserve Bank of New York losing its power as the leading banking regulator on Wall Street.
The Fed's center of regulatory authority is now quietly controlled by an obscure committee headed by Fed governor Daniel Tarullo, which keeps a close watch on such banking giants as Goldman Sachs Group and Citigroup Inc., The Wall Street Journal reported
The behind-the-scenes reorganization was initially unveiled in a paper known as the Triangle Document, which was given little attention when it was drawn up in 2010.
Under the new system, the central bank in Washington is now at the hub of all banking supervision, while exerting control over the Fed's 12 reserve banks, including the New York Fed.
"This reserve bank doesn't breathe any more without asking Washington if it can inhale or exhale," a prominent source in the banking community told the Journal about the New York Fed.
The power shift was instigated after the financial mayhem in 2008, and has gained traction over the past five years, the Journal said, while noting that the changes have increased oversight on the biggest banks on Wall Street.
Since the changes were implemented, the Fed in Washington has challenged decisions by examiners for the New York Fed, who have also been shut out of policy meetings and been openly criticized by Tarullo for not preventing a slew of banking problems, according to Fed officials.
"It was obvious that a lot in the U.S. regulatory system had not worked particularly well before the crisis," Tarullo said. "It was equally obvious that there was going to need to be a rethink and reorganization."
Although the Fed has gradually been taking away regulatory power from the New York Fed, the central bank has not talked about it until now, according to the Journal.
"The Federal Reserve is requiring more of large institutions," Fed Chairwoman Janet Yellen said in a speech this week that addressed the revamp. "We are also requiring more of ourselves."
The Journal's Jon Hilsenrath wrote: "At the center of the organizational shift are broad regulatory questions that have continued since the financial crisis — how to avoid getting too close to the banks, and whether hard data should trump human judgment in overseeing financial firms.
"Many of the firms that faced the gravest trouble in 2008 — Bear Stearns, Fannie Mae, Freddie Mac, American International Group and Lehman Brothers — weren't the responsibility of the New York Fed. But it has borne the brunt of the blame, as the central bank's eyes and ears on Wall Street."
Hilsenrath added: "Before the financial crisis, New York Fed officials regularly took part in Washington-run meetings on regulatory policy, such as rules for derivatives oversight or capital. Mr. Tarullo ended the practice of including New York officials in these high-level meetings."
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