Pressured Fed launches review of 'cosy' ties with banks

The Fed reviews will look at whether its inspectors and the board receive all the information they need to supervise banks, especially the largest ones. -- PHOTO: REUTERS
The Fed reviews will look at whether its inspectors and the board receive all the information they need to supervise banks, especially the largest ones. -- PHOTO: REUTERS

WASHINGTON (AFP) - The Federal Reserve announced on Nov 20 that it was reviewing its bank examination operations amid accusations that its regulators are too cosy with the banks they oversee.

One day ahead of a Congressional hearing into whether the Fed is subject to "regulatory capture" - when regulators become too close to and supportive of their charges - the Fed said it had opened two internal reviews of the question.

The reviews, one by the Fed's inspector-general and one by the Federal Reserve Board, will look at whether its inspectors and the board receive all the information they need to supervise banks, especially the largest ones.

In addition, they will examine whether regulatory decision-makers are getting all the divergent opinions from the bank examiners.

The internal probe and the hearing on Nov 21 by the Senate Banking Committee come amid accusations by a former bank examiner at the crucial New York branch of the Fed that it is soft on the mega-banks it regulates.

The examiner, Ms Carmen Segarra, said her work in supervising Goldman Sachs exposed various problems including questionable conflicts of interest.

But her supervisors told her to tone down the criticisms, and when she did not, ultimately fired her.

Ms Segarra's wrongful termination suit against the New York Fed was rejected by the court.

But a September article by the investigative journalism organisation ProPublica provided fresh details of her allegations using previously unknown recordings she made in meetings between Fed and Goldman officials.

The article alleged that the New York Fed continued to go easy on the country's largest banks despite the 2008 financial sector meltdown.

"At a pivotal moment in its effort to become a more forceful financial supervisor", the tapes "portray a New York Fed that is at times reluctant to push hard against Goldman", said the article, written by ProPublica's Mr Jake Bernstein.

Fed critics say many of its officials are too close to their charges and have either come from jobs at the big banks or are eventually headed to jobs with them, compromising their independence.

Underscoring the issue, Goldman Sachs recently fired two employees after one was able to obtain confidential information on a bank from a former colleague at the New York Fed. According to reports, the Fed also fired an employee in the case.

Ahead of his appearance at Friday's hearing, New York Fed chief William Dudley - himself a former managing director at Goldman Sachs - released written testimony in which he said substantial changes have been made to regulating operations since the 2008 financial crisis.

"It is undeniable that banking supervisors could have done better in their prudential oversight of the financial system" at that time, he said.

"We understand the risks of doing our job poorly and of becoming too close to the firms we supervise. We work hard to avoid these risks and to be as fair, conscientious and effective as possible."