Federal Reserve supervisors can reduce but not eliminate the risk of bank failures, New York Fed President William Dudley said on Friday in a defense of his agency’s Wall Street oversight as a congressional review of it ramps up.
Supervisors, who sometimes work day-to-day inside banks, “can reduce the chances” that these firms fail “but can never guarantee” that, said Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street.
The New York Fed has been the target of criticism since the financial crisis for missteps and perceived conflicts of interest. Reuters reported this month that Democratic House lawmakers Maxine Waters and Al Green asked a congressional watchdog to investigate lax bank oversight there.
Dudley, addressing a New York Fed conference of regulators and academics, added that because much of this work is confidential, more work on supervision is needed to, in part, help the public understand what can be a mysterious activity.
The New York Fed held the conference as the influence of Wall Street on politics and the question of financial stability looms large in the U.S. presidential campaign, especially among Democratic candidates Hillary Clinton and Bernie Sanders.
Combined, the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency employ hundreds of U.S. government supervisors in U.S. banks to monitor for risks, judge bankers’ activities for compliance with rules, and to demand changes as needed.
Waters, ranking Democrat on the House Financial Services Committee, said she asked the Government Accountability Office to investigate the New York Fed to ensure the central bank “is as strong, independent, and effective as possible and I have a responsibility to respond to questions about supervisory issues at the agency.”
“I am hopeful that GAO’s review of this matter will help us identify any areas where changes to internal policies and protocols may be warranted,” she said in an emailed statement.
FDIC Vice Chairman Thomas Hoenig, addressing the New York Fed conference, said there are problems with the practice of “embedded” bank supervisors. “Effective supervision requires an objective review, which is difficult to maintain for embedded analysts who are practiced in reviewing management-presented material and reports.”
“This too often becomes a self-assessment exercise that provides limited independent insight into the workings and risk profile of the largest firms,” Hoenig added, suggesting a rotation of examiners between banks.