Financial thoughts

The Federal Reserve, which is urging Congress to let it keep its bank supervising role, may lose oversight of smaller state banks to the Federal Deposit Insurance Corp., Democratic Senator Jack Reed said.

“What seems to be emerging is the consolidation” of two Treasury bank agencies “with FDIC having some responsibility for state banks as regulator in lieu of the Fed,” Reed, a Rhode Island Democrat and a member of the Senate Banking Committee, said yesterday in a Washington interview.

Senate negotiators are working through proposals to put in place the financial rules proposed by President Barack Obama more than eight months ago, a process stalled by disagreements over the Fed’s role and consumer protection.

Lawmakers are negotiating language that may give the Fed oversight of the largest U.S. financial companies along with a new consumer unit, two Democratic congressional aides with knowledge of the talks said yesterday. The consumer proposal from Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Republican Bob Corker of Tennessee has so far failed to win lawmaker support.

Republicans and the financial-services industry oppose Obama’s Consumer Financial Protection Agency, and Dodd and Corker have scrapped the plan. Banks lobbied against the proposal, with JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon calling the agency “just a whole new bureaucracy” on a December conference call with analysts.

The Senate plan under consideration would put the Fed in charge of about 20 or 30 bank holding companies, said one Democratic congressional aide who declined to be identified because the talks are private. The Treasury’s Office of the Comptroller of the Currency, which oversees national banks, and Office of Thrift Supervision would merge, Reed said.

Bernanke Setback

A loss of oversight would be a setback for Fed Chairman Ben S. Bernanke, who told the Banking Committee on Feb. 26 it would be a “grave mistake” to remove authority to regulate banks. Giving another agency the power would make it tougher for the Fed to act as the lender of last resort, he said free credit report online.

The Fed won endorsement yesterday from six Washington-based trade groups, led by the American Bankers Association. A letter to the banking committee said “it would be a mistake to limit the Federal Reserve to supervision of only larger, complex institutions headquartered in major financial centers.”

Treasury Secretary Timothy Geithner had asked the leaders to back the administration’s rules overhaul at a Feb. 25 Washington meeting. Later, groups including the Financial Services Roundtable and Securities Industry and Financial Markets Association agreed to write a letter, according to two people with knowledge of the matter, who declined to be identified because the meeting was private.

Small Bankers

The leaders then recruited the Consumer Bankers Association and Independent Community Bankers of America, which represent small banks, the people said. Both support the Fed as overseer of some state-chartered banks. The Senate legislation may give such power to the FDIC, which regulates some state-chartered banks.

A copy of the letter was sent March 2 to Michelle Smith, the Fed spokeswoman and adviser to Bernanke, the people said.

The Fed’s role emerged yesterday as senators negotiated the powers of a consumer unit at the Fed.

“Each of these pieces affects another piece in the bill,” Corker said in an interview. “Today has been by far the very best day we’ve had in the process.”

The plan for the Fed, still under discussion and may change, would abandon the single bank regulator Dodd proposed in his November draft legislation.

Dodd wanted to eliminate the OCC, which regulates national banks, and the OTS, the regulator of savings and loans, and merge their authority into a new Financial Institutions Regulatory Administration that would gain oversight powers of the FDIC and the Fed. The House passed a bill in December that merged OCC and OTS, leaving the Fed’s bank oversight powers intact.

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