No Matter Who Was In Charge, Just Blame The Fed

Source: Forbes

When I was SVP in charge of the Richmond Fed’s Baltimore branch and attended Maryland Bankers Association events, I always cringed when I was introduced, along with the state banking commissioner, as a banking regulator. She was, but I wasn’t. Our examination department was housed in the home office in Richmond and the branches were not involved. I thought of myself as an economist, not a regulator. Maybe my cringe reflected some degree of “regulatory capture.”

What reminded me of this was the recent attention paid to the regulatory/supervisory role of the Fed, especially the New York Fed. The New York Fed has been blamed for failure in assignments it never received.

Here is the convoluted regulatory structure prior to the financial crisis: All national banks were supervised (examined) by the Controller of the Currency. State chartered banks were examined by state banking departments if the bank had not joined the Federal Reserve System and by the Fed if they had joined. Therefore, most of the banks examined by the Fed were smaller state-chartered banks, none of which were on Wall Street. The Fed had a smaller number of banks under it’s jurisdiction than either the Comptroller of the Currency or the FDIC.

In addition to state chartered banks, the Fed was assigned responsibility for bank holding companies, which included Citibank and J.P. Morgan/Chase, which were on Wall Street. We are talking about commercial banks here, not investment banks like Lehman Brothers, Bear Sterns, Morgan Stanley and Goldman Sachs. These investment banks were under the jurisdiction of the SEC. At the height of the financial crisis, Goldman Sachs and Morgan Stanley applied to the Fed to form a bank holding company so they could access the Fed’s discount window. So, subsequent to the crisis they have been under the Fed’s jurisdiction, but not before.

My simple point here is to remind us that the primary regulator of most large commercial banks was and continues to be the Comptroller of the Currency and the primary regulator of the investment banks before the crisis was the Securities and Exchange Commission. Yet, I’ve heard very little criticism of them; only the Fed is in the cross-hairs. That’s probably an unintended compliment for the Fed since people seem to think it is in charge of everything and responsible for everything.

While I’m at it, I’d like to point out that the commercial banking system did not cause the financial crisis; they were major victims of the crisis. The crisis was caused by the mostly nonbank lenders making subprime loans they shouldn’t have made and by the mostly Wall Street investment banks that securitized and sold them to investors. Many of those investors were smaller commercial banks who bought them with the comfort that they were rated AAA. The exceptions were Citi and J.P. Morgan/Chase, which were commercial banks with investment banking business as well.

I know all this is convoluted. It’s easier to just blame the Fed.