The Federal Reserve scored a political victory on Tuesday as Democrats mulling financial reform backed off measures that would expose monetary policy to audits and make the head of the New York Fed bank a political appointee.
The U.S. House of Representatives had approved a bill in December that included a provision, championed by Texas Representative Ron Paul, that would have opened the Fed's interest rate policy to congressional audits.
But in a statement, House Democrats participating in negotiations on Tuesday over a final financial reform bill signaled a willingness to live with a narrower Senate audit provision that does not cover monetary policy.
The House Democrats also said they would try to defeat a plan contained in the Senate bill under debate that would allow the U.S. president to name the head of the New York Fed, a step Fed officials had argued would undercut the central bank's political independence.
The Senate bill sets up a consumer protection bureau as a part of the U.S. central bank that is funded by the Fed. The agency would have power to write consumer protection rules, but the Fed would have a role overseeing the agency. The House bill proposes a new, fully independent U.S. Consumer Financial Protection Agency to regulate mortgages, credit cards and other products.
SYSTEMIC RISK REGULATION
The Senate measure sets up an inter-agency Financial Stability Oversight Council chaired by the Treasury secretary to watch for dangers that could roil the wider financial system, giving the Fed some powers to take action.
The House creates a similar council, but gives the Fed a much larger role in executing policy by setting limits for large, interconnected firms that could threaten economic stability.
The Senate bill formally gives the Fed responsibility for monitoring and defusing risks to U.S. financial stability. The House bill allows the Fed to limit credit exposures at financial firms, block acquisitions, restrict pay and shut down undercapitalized firms.
SYSTEMICALLY IMPORTANT FIRMS
The Senate bill puts the Fed in charge of supervising all financial firms, not just banks, with assets greater than $50 billion that could rock the financial system if they collapsed. The House bill lets a systemic risk council impose stricter standards for systemically important financial firms.
The House bill allows reviews of Fed monetary policy decisions by the Government Accountability Office, a congressional investigative agency. The Senate bill calls for a one-time audit of the Fed's emergency lending during the 2007-09 crisis, but does not touch monetary policy. The Fed successfully fought off a Senate provision that would have exposed it to repeated audits of its emergency lending.
On June 15, House Democrats said they would seek to amend the provision to add discount window and open market operations to items subject to audit.
The Senate bill makes the head of the New York Federal Reserve Bank a presidential appointee subject to Senate confirmation; currently, the head is chosen by the New York Fed's board of directors.
On June 15, House of Representatives' Democrats said they will seek to strike that provision from the final bill.
In its place, the House negotiators want to insert a provision that would prevent regional Fed bank directors that represent banks from having a say on who will head their Fed bank, according to a counteroffer released by House Democrats.
The Senate bill would prevent bankers supervised by the Fed from selecting or serving on the boards of directors of the 12 regional Fed banks around the country.
Currently, regional Fed boards are composed of a combination of bankers, individuals chosen by bankers, and individuals chosen by the Fed Board of Governors in Washington.
The Senate bill also establishes a Fed vice chairman for supervision and calls for an audit of Fed system governance by the GAO, focusing on whether there are conflicts of interest in the way members of regional Fed bank boards are elected by banks.
The House bill makes no similar changes.
The Senate bill eliminates the Fed's ability to lend to firms that do not already have access to its emergency lending facilities. During the financial crisis, the Fed provided funds to some non-bank Wall Street firms, citing a rarely used emergency provision of law. Usually, it lends only to banks.
The House bill puts a specific $4 trillion cap on Fed emergency lending and imposes controls by other agencies.
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