The lack of clarity over bank supervision duties led to conflicting stories in The Washington Post and Reuters over whether the Fed would become the top banking regulator or the assignment would fall to an agency created by a proposed merger of the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Right now the Fed is the chief regulator of bank holding companies and as such is charged with making sure that any risky activities engaged in by the companies' nonbank subsidiaries can't spill over and weaken the insured bank. Under Paulson's plan, however, which holding company duties would remain with the Fed isn't completely spelled out. Officially, the Fed would lose its formal assignment as supervisor of bank holding companies and the task of making sure that bank subsidiaries aren't lending to sister subsidiaries and that they establish adequate firewalls between them and other affiliates of the parent company becomes the duty of a new "prudential financial regulatory agency."
The prudential regulator will assume duties of the OCC and OTS, which currently are the direct supervisors of national banks and federally chartered savings and loans. But the Fed would retain substantial authority over bank holding companies as the agency assigned to safeguard overall stability in the financial markets and will have authority to scrutinize all financial institutions whenever it has questions about their practices and potential risks they pose to the markets.
In practice, just where the "prudential" regulator's authority would end and the Fed's would begin is a bit hazy, says Karen Garrett, banking counsel in the Kansas City office of Bryan Cave LLP. Until details are worked out in legislation, the delineation of duties is a bit vague, "but the primary suggestion is for the prudential regulator to have supervisory duties over banks and their affiliated companies generally but when their activities might affect market stability the Fed is supposed to have input." Currently the Fed typically relies on the OCC to conduct in-depth examinations of national banks owned by holding companies but oddly enough could end up doing more examinations under the regime suggested by Paulson, adds Ron Glancz, chair of Venable LLP's financial services group in Washington. If the Fed suspects risks are being created by a banking company's activities, it will need to conduct exam reach down to the bank subsidiary. He said. "It's the bank transaction level where the risk would be created." - Bill McConnell
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It's clear that the Federal Reserve Board gains new powers over Wall Street investment banks under the financial reform "blueprint" unveiled Monday by Treasury Secretary Henry Paulson. But what happens to the Fed's current authority over the largest of commercial banks (which unlike investment banks hold federally insured deposits) is a bit hazy and would have to be worked out later by Congress.
