Diane Swonk, Chief Economist
Mar. 17, 2010 – 7:30 a.m. CT
Ben Defends Fed Territory
In testimony to the Committee on Financial Services for the House of Representatives, Fed Chairman Ben Bernanke defended the Fed's role in regulating small as well as large banks. New financial reform legislation would put the regulation of smaller, state-chartered banks solely in the hands of the FDIC.
To some extent, the Chairman's remarks represent a turf battle between the Fed and the FDIC. The regional Feds, in particular, could be hurt by a reduction in state-based oversight. There is, however, a larger issue at hand. The Fed relies heavily on the real-time information it gathers from smaller banks, to better gauge the status and stability of the financial system – which is its responsibility – and the economy more broadly.
Of all the arguments that Bernanke makes about the Fed's capabilities to regulate smaller banks, the latter point is probably the most important. The official economic data is flawed at best – especially during turning points in the economy – and one of the few hopes the Fed has in getting its analysis and policy actions right rests in its ability to gather soft as well as hard economic data. Hence, its need to gain access to information from as many outlets as possible. Indeed, one could argue that the information the Fed garners from the smaller banks that it regulates is even more vital today, given the destruction of the $10.5 trillion shadow banking system. Banks are the only way small businesses and consumers can gain access to credit, and if the Fed loses its oversight of small banks, it will lose a vital source of real-time information on the status of Main Street.
The Bottom Line: I am not sure I completely agree that the Fed is the BEST regulator out there, given mistakes made in recent years, but it is important for the Fed to maintain its finger on the pulse of this very important part of the economy, and on that front, I agree with Ben.
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