Fed Presidents Take Case to Congress for Keeping Bank Oversight

Some Federal Reserve regional bank presidents, concerned that financial-overhaul legislation will imperil their institutions, are making their own case to Congress.

Leading the effort are the Kansas City Fed’s Thomas Hoenig, the longest-serving policy maker, and Jeffrey Lacker of Richmond, chairman of the Fed’s Conference of Presidents, said officials with knowledge of the deliberations. In an opening salvo, Hoenig sent a letter Feb. 19 to 14 senators saying proposed laws in the Senate wouldn’t improve financial regulation.

Senate Banking Committee Chairman Christopher Dodd has proposed stripping regional banks’ duties while giving the Fed’s Washington-based Board of Governors some oversight of big firms. The measure would leave most of the 12 district banks with little to do outside of helping set interest-rate policy. The presidents’ campaign wasn’t opposed by the board, which has a staff dedicated to dealing with Congress.

The lobbying “reflects the frustration on the part of the district banks with the board’s efforts to retain its supervision and regulatory powers over community banks,” said Camden Fine, president of the Independent Community Bankers of America, a Washington group representing about 5,000 firms. The Fed has a “very steep, uphill fight” against the legislative proposals, Fine said.

Fed bank presidents held a conference call Feb. 18 to plot strategy and plan to contact individual lawmakers, said officials with knowledge of the discussions, and Hoenig is scheduled to appear on C-Span this week. The call was separate from a regularly scheduled talk on Mondays with Fed congressional liaisons.

Draft Legislation

Bank presidents began discussing establishing more direct contact with Congress after draft legislation from Dodd, a Connecticut Democrat, proposed to strip the Fed of bank supervisory powers and the House approved a bill in December that would open monetary policy to government audits.

Some presidents decided that the Board of Governors’ lobbying efforts didn’t produce any wins for the Fed and then decided to make their case with legislators directly, according to an official familiar with the conversations.

“It is a striking irony to me that the outcome of the public anger directed toward Washington and Wall Street may lead to the further empowerment of both Washington and Wall Street in regulating financial institutions,” Hoenig said in the letter, written in response to lawmakers’ questions.

Banking Panel Members

Hoenig’s missive was addressed to Senator Michael Bennet, a Colorado Democrat, and Senator Mike Johanns, a Nebraska Republican, both members of the banking panel. It was copied to the 12 other senators in Hoenig’s seven-state region.

Michelle Smith, spokeswoman for the Fed’s board in Washington, and Laura Fortunato, a spokeswoman for the Richmond Fed, declined to comment.

The proposal on bank supervision powers is one of several threats to the Fed in recent months.

Fed Chairman Ben S. Bernanke won a 70-30 Senate vote last month for a second four-year term, the most opposition since the chamber started approving Fed chiefs in 1978. Another part of the Senate legislation may give the White House and lawmakers greater say in selecting the regional Fed presidents.

The topics may come up when Bernanke visits Capitol Hill Feb. 24-25 for semiannual testimony on monetary policy and the economy, in hearings before the House Financial Services Committee and the Senate banking panel.

Amplifying Defense

Bernanke has been amplifying his defense as well. Last month he sent an 11-page letter to senators saying stripping the central bank of its authority to supervise banks could harm its ability to conduct monetary policy and provide emergency aid to lenders. The board delegates bank-supervision powers to the regional banks.

“We’re all pulling in the same direction,” which is to have the supervision powers “that are appropriate for the Federal Reserve to do our duty” as the lender of last resort, Dallas Fed President Richard Fisher said in an interview. He said he hasn’t contacted lawmakers on the issue and doesn’t plan to.

Hoenig, 63, a former bank examiner, will get to discuss the issues before a national television audience this week. He is tentatively scheduled to appear on C-Span’s morning call-in show Feb. 26, said Howard Mortman, a spokesman for the network.

‘Depth of Experience’

“The supervision of state-chartered member banks provides the Federal Reserve with its depth of experience regarding details about banking operations and management, and its oversight of bank holding companies provides a breadth of knowledge and insight regarding industry trends and activities,” Hoenig said in the letter, also provided to bankers, Fed directors and state regulators in the region.

Differences between the board and the presidents are “not as rare as you think,” said Fine, who backs the presidents’ efforts to keep the powers. “This one might be more public.”

Dodd and other lawmakers blame Bernanke and the Fed for lax supervision of banks that preceded the financial crisis and taxpayer-supported bailouts of firms including American International Group Inc. and Citigroup Inc.

Minneapolis Fed President Narayana Kocherlakota said last week in his first speech since taking office in October that stripping the Fed’s bank-supervision powers “is a step in the wrong direction.”

Programs the Fed created to combat the financial crisis, such as stress tests of banks and changes to lending through the discount window, would have been “significantly more difficult, if not actually impossible, in a world in which the Federal Reserve did not have a supervisory role,” Kocherlakota, 46, said Feb. 16 in St. Paul, Minnesota.