Fed officials warn against loss of bank oversight

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Four top Federal Reserve officials urged Congress on Thursday not to strip the US central bank of the authority to supervise small banks, saying they would lose an important finger on the pulse of the economy that helps them guide monetary policy.

A financial regulatory overhaul bill unveiled in the US Senate this week would diminish the powers of most of the regional Fed districts and leave some with no banks to oversee.

"It is a travesty," Thomas Hoenig, president of the Kansas City Federal Reserve Bank, told a bankers' group. "It is absolutely disenfranchising our relationship with a very important, hugely important, sector outside of Wall Street across the United States."

"It makes the central bank the central bank of Wall Street and not of the United States," he said.

Hoenig, along with president of the Cleveland Federal Reserve Bank, Sandra Pianalto, Richmond Fed chief Jeffrey Lacker, and Fed Governor Elizabeth Duke presented a united front against the proposal at a conference sponsored by the American Bankers Association.

The Senate proposal would shift oversight of banks with assets of less than USD 50 billion from the Fed to other regulators. By some estimates, that would reduce the number of banks under Fed supervision from around 5,800 to 50.

Fed Chairman Ben Bernanke had presented a similar argument to lawmakers on Wednesday.

Hoenig said the legislation introduced by Senator Christopher Dodd on Monday would remove all of the banks in his district from his bank's supervision. Other districts, such as St. Louis, would likely also have no more banks to supervise.

Duke said the US central bank's broad supervisory authority gives it a better understanding of the economy's condition and it would be a mistake to narrow that focus to only larger banks.

Duke said broad-based knowledge of banks' condition was "specially helpful" to Fed policy makers during the financial crisis when they had to respond quickly to changing conditions.

"So I would hate to see the Federal Reserve become focused too narrowly on the activities of just the largest institutions," she said in a separate speech.

Since Dodd announced his bill, shares of smaller banks have outperformed big bank stocks on the expectation that larger firms will face tougher requirements that will hurt profits.