Tags: federal reserve | banks | new york | authority

Missteps, Consolidation Eroded New York Fed Authority Over Banks

Thursday, 05 Mar 2015 01:32 PM


The New York Federal Reserve's once-unparalleled authority to oversee Wall Street has been weakened by a series of supervisory missteps and by a consolidation of power at the U.S. central bank's Washington headquarters.

Current and former New York Fed employees say its ability to independently regulate the country's largest banks began to deteriorate after the financial crisis, and got worse once U.S. Congress passed its landmark Dodd-Frank reform bill, prompting the Washington-based Federal Reserve Board of Governors to take a more active role.

The legislation sparked the creation of the Financial Stability Oversight Council, a U.S. Treasury unit of which Fed Chair Janet Yellen is a member, as well as the Large Institution Supervision Coordinating Committee, which oversees the biggest banks and is headed by Fed Governor Daniel Tarullo.

The Washington-based Fed board "felt the need to directly manage the process in a way that hadn't existed before," said a former New York Fed employee who requested anonymity. "Big regulatory issues are basically being handled in Washington, not in New York where all the big banks are, and so institutional expertise is being lost."

A representative of the New York Fed declined to comment.

The New York Fed is the central bank's eyes and ears at Citigroup Inc., Morgan Stanley and other big banks. Its on-the-ground examiners did much of the leg work preparing for the bank "stress tests" that the Fed board administers and is set to release later on Thursday.

But while some at the New York Fed have quietly complained about second-guessing in Washington, it has come under fire for a series of oversights and perceived conflicts of interest in recent years.

An inspector general report found that it failed to head off risks that JPMorgan Chase & Co was taking in its massive "London Whale" bets before the massing trading losses were incurred in 2012.

Congress has blasted the New York Fed and its president, William Dudley, after a former employee alleged that examiners embedded at Goldman Sachs Group Inc went easy on the bank, and after the New York Times reported that a Goldman banker received confidential information from the New York Fed, his former employer.

The negative publicity is disheartening for New York Fed examiners, said another former employee, adding the friction between New York and Washington has grown in recent years.

The Wall Street Journal reported on Thursday that the new centralized structure is detailed in a 2010 paper called the Triangle Document, showing Washington exercising control over the Fed's 12 regional banks.

"It was obvious that a lot in the U.S. regulatory system had not worked particularly well before the crisis," the paper quoted Tarullo as saying.

Most of the New York Fed's supervisors working from offices within Wall Street banks have been relocated in recent years back to headquarters, according to sources.

Said the first source: "Local supervision has become less qualitative, more about pushing numbers around."

© 2017 Thomson/Reuters. All rights reserved.

   
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The New York Federal Reserve's once-unparalleled authority to oversee Wall Street has been weakened by a series of supervisory missteps and by a consolidation of power at the U.S. central bank's Washington headquarters.
federal reserve, banks, new york, authority
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2015-32-05
Thursday, 05 Mar 2015 01:32 PM
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