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Home >> Daily Dose >> A House Divided: Differing Views on the Fed’s Oversight
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A House Divided: Differing Views on the Fed’s Oversight

A House Financial Services Committee that has been bitterly divided over the Republican majority’s recent efforts to replace the controversial Dodd-Frank Wall Street Reform Act examined the effectiveness of the Federal Reserve’s regulation and supervision of the country’s financial system on Wednesday.

One side of the aisle was heavily critical of the Fed’s oversight and the “one size fits all” approach by Dodd-Frank when it comes to regulating the financial industry. They also criticized the Fed for a perceived lack of transparency when it comes to living wills (banks’ plans for easing into bankruptcy without disrupting the financial system) and stress tests (reviews to determine if a bank has enough capital to remain solvent during an economic downturn).

The other side of the aisle defended Dodd-Frank and cited the recent Wells Fargo controversy, in which the bank was penalized $185 million for opening 2 million unauthorized credit card accounts, as evidence that more oversight is needed.

Federal Reserve Chairman Janet Yellen, the lone witness at Wednesday’s hearing in the Committee, told the Committee that she did not believe in the “one size fits all” approach when it came to regulating banks—and that she believes regulations should be tailored to the size of the banks.

“[O]ur post-crisis approach to regulation and supervision is both forward-looking and tailored to the level of risk that firms pose to financial stability and the broader economy,” Yellen said. “Standards for the largest, most complex banking organizations are now significantly more stringent than standards for small and medium-sized banks, which is appropriate given the impact that the failure or distress of those firms could have on the economy. As I have discussed, we anticipate taking additional actions in the near term to further tailor our regulatory and supervisory framework.”

Federal Reserve Chairman Janet Yellen

Yellen’s testimony before Congress, which was part of a semiannual hearing on the Fed’s oversight of the financial system, came just a few days after Fed Governor Daniel Tarullo told an audience at Yale University that certain firms with less than $250 billion in assets that do not have significant international or nonbank activity will be exempt from the Fed’s stress testing. Approximately 25 regional banks will be affected by this change.

Yellen said on Wednesday that community banks were “significantly healthier” and cited several ways in which the Fed was attempting to reduce the regulator burden for smaller banking institutions, notably with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).

The Committee majority was skeptical of this, however.

“Where has the Fed’s omnipotence taken us?” Committee Chairman Jeb Hensarling (R-Texas) said. “The big banks are now bigger, the small banks are fewer, economic growth lags, and there is scant evidence our economy is more stable. . . And despite claims by the Fed that it ‘tailors’ regulations to fit the size of financial institutions, we know small banks are suffering disproportionately under Washington’s thumb. As we lose, on average, one community financial institution per day, consumers lose options to help them achieve financial independence—small businesses lose opportunities to grow jobs and the big banks just keep getting bigger.”

The Committee minority took a different view, stating that the recent controversy around Wells Fargo should serve as a reminder of why regulation such as Dodd-Frank is necessary in a post-crisis financial world.

“The Dodd-Frank Act has required regulators to increase capital and liquidity standards, reduce interconnection in the financial markets, and more closely scrutinize large financial firms’ risk management. However, there is much work left to be done,” Committee Ranking Member Maxine Waters (D-California) said. “As we have seen from the enormous failure of risk management at Wells Fargo, it’s important to remind the Committee—and the public—why these reforms were necessary in the first place. Fraudulent retail banking practices may not in and of themselves pose systemic risk, but they surely indicate mismanagement that could be catastrophic in riskier and more complex divisions of a bank holding company. Supervisors and law enforcement must continue to hold both institutions and individuals accountable.”

About Author: Seth Welborn

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Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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