Latest News

Fed – regional FRBs face uncertainty 4/1 WSJ The Fed’s 12 regional banks, shrinking, face uncertainty about their future under Treasury Secretary Paulson’s blueprint for restructuring financial regulation. The blueprint suggests no major changes for the Fed in the near term. But in the intermediate term, either the central bank or the FDIC, which jointly oversee state-chartered banks, might have to relinquish its share of that responsibility to the other. The outcome will depend on the results of a study recommended by the blueprint. ‘This study should examine the evolving role of Federal Reserve Banks,’ the document said. In Paulson’s ‘optimal’ scenario, the Fed would surrender both its oversight of state-chartered banks & of bank holding companies to a new ‘prudential financial regulatory agency.’ The Issue: The Fed’s 12 reserve banks could lose part of their purpose under a Treasury plan to consolidate bank supervision in a new agency. The Background: The reserve banks have seen employment drop as check-processing volumes have declined & many major banks have merged. The Future: Previous proposals to strip the Fed of supervisory responsibility stalled, & the latest one isn’t likely to move forward for years, if ever.By law, bank supervision is the responsibility of the Fed’s 7-member board in Washington. In practice, the Fed board mostly writes & interprets regulatory policy, & it delegates bank examinations to its 12 regional banks. Under the ‘optimal’ plan, the Fed would still gather & analyze information from all financial institutions, not just banks, to fulfill its new role as market-stability regulator. It would ‘consult & provide input on certain regulatory requirements’ for those institutions. But it would lose many of its front-line supervision duties. That would hurt the staffing of the regional Fed banks, which are spread across the country from Boston to San Francisco. Since 2002, total employment at the those regional banks has fallen 8% to a budgeted 19,282 last year, while employment at the Federal Reserve Board in Washington has risen 6% to 2,002. The rise of debit cards, electronic bill payment & check imaging has reduced the number of the Fed banks’ employees involved in providing fee-based services, such as check clearing, by ½ to 2,707. Monday, the Fed said it was accelerating the restructuring of its check processing, with 7 instead of 5 sites scaling back on those duties. The regional banks’ supervisory roles have been curtailed by bank mergers, which have left some districts with few, if any, major banks. Even so, at 2,676 supervisory employees, the reserve banks’ number has remained roughly constant since 2002, more than double the number devoted to monetary & economic policy. Losing those employees would be another blow to the prestige & purpose of the Fed banks. At the Fed board, about a quarter of the 2,000-member staff is devoted to research & monetary policy. The reserve banks ‘are scrambling to keep jobs & figure out what their role is,’ said Robert Eisenbeis, former research director at FRB Atlanta. ‘If you took supervision & regulation away, that would be another big problem. It’s a case where the board doesn’t want responsibility for the micro side, they just want the policy.’ Fed officials fret that examiners’ morale might suffer from uncertainties surrounding their future at a time when an increase in the number of problem banks leaves their work cut out for them. Previous proposals to strip the Fed of its supervisory duties went nowhere, & the latest one probably won’t move forward for years, if ever. The reserve banks operate several important payment systems for moving money & securities among commercial banks. The Treasury questions whether they should still run such systems if, as the blueprint recommends, the Fed is made sole regulator of those systems. Each of the 12 regional Fed banks is a separate entity, with its own president & a nine-member board of directors. By law, 6 are elected by commercial banks that are members of the Fed, including 3 to represent banks & 3 to represent the public; the other 3 are chosen by the Fed board, which designates a chairman. Although created by Congress, the 12 Fed banks receive no congressional appropriations, instead earning income on fees, interest on the holdings of US Treasury securities & interest on loans to banks. Legally, they are owned by commercial banks; in practical terms, they are subject to the control of the Fed board in Washington, whose members are nominated by the president & confirmed by the Senate.