A Stress Test for the New York Fed

A debate has erupted whether the Federal Reserve Bank of New York has accumulated too much power and needs to be reigned in.
A Stress Test for the New York Fed
. AP Photo/Mark Lennihan
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Outgoing Dallas Fed President Richard Fisher has suggested the New York Fed be stripped of its authority over many of the largest banks because it is seen as too cozy with them. San Francisco Fed President John Williams has said he doesn’t believe there needs to be any changes.

 In Congress, interest in reform is coming from both sides of the aisle. Alabama Republican Sen. Richard Shelby, the new chairman of the Senate Banking, Housing and Urban Affairs Committee, has said Fisher’s proposals deserve consideration. Democrat Jack Reed of Rhode Island has a bill to require Senate confirmation of the New York Fed’s president.

Fed Chairwoman Janet Yellen, meanwhile, has testified that she does not believe changes are necessary. In a speech last week, she detailed measures established in 2010, including stress tests to ensure banks have adequate capital, that have centralized supervision in Washington.

Echoing Yellen’s themes, a Wall Street Journal story the day after her speech cited a previously unreported Fed document to describe how centralization had diminished the New York Fed’s authority. The document describes a now 5-year-old structure whereby supervision decisions by New York and other regional reserve banks that monitor large firms are vetted by a committee headed by Board Governor Daniel Tarullo.

Critics on both the right and left are skeptical that the New York Fed’s power has slipped much because of its unique role. The New York Fed supervises 13 of the 16 banks deemed the most systemically important. It has a larger voice in monetary policy than any of the regional Fed banks. Of the 12 reserve banks, New York is the only one that conducts its own enforcement investigations.

“Has the New York Fed really lost this authority, power, sway? I am doubtful,” said Simon Johnson, a senior fellow at the Peterson Institute for International Economics.

“This large institution group at the Board has been there for a while,” added Paul Kupiec, referring to the Large Institution Supervision Coordinating Committee, the panel headed by Tarullo that was set up to review high-level supervision decisions and plot policy direction.

Kupiec, a resident scholar who specializes in banking at the American Enterprise Institute, a conservative think tank, said the steps taken so far by the Federal Reserve have likely done little to assuage lawmakers’ concerns with the New York Fed’s disproportionate clout. “I don’t think it changes anything about the Congressional reform,” he said.

A spokesman for the Federal Reserve Board declined to comment on any diminishment of the New York Fed’s power, or on proposals to restructure the Fed to reduce New York’s influence.

Fed Chairwoman Janet Yellen, has testified that she does not believe changes are necessary.(AP Photo/Pablo Martinez Monsivais)
Fed Chairwoman Janet Yellen, has testified that she does not believe changes are necessary.AP Photo/Pablo Martinez Monsivais
Jake Bernstein
Jake Bernstein
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