Federal Reserve Chairman Ben S. Bernanke has supported the current decentralized structure of the central bank with 12 regional banks. He said that a central agency monitoring the activity of the larger financial institutions in the country alone is not sufficient. A decentralized network of oversight and monitoring is important to lend support to the smaller banks spread across the country.
He was of the belief that without the regional support, the central agency would most likely get a distorted picture, which may not be enough to frame monetary policies that benefit all sections of the economy participants. He also said that the inputs received by the Fed from community banks are very helpful in understanding the larger scheme of things more accurately. These inputs are particularly useful when it comes to getting a clearer picture of the on ground situation, be it of the real estate sector or credit markets. Bernanke expressed these opinions while speaking at an event in Orlando, Florida.
These statements can be viewed in light of the recent proposition made by Christopher Dodd, Senate Banking Committee Chairman to shrink the role of the Federal Reserve in supervision of banks across the country. The Fed currently oversees around five thousand bank holding companies and over eight hundred other regional banks.
Dodd has proposed that the Fed going forward should only oversee the larger bank holding companies, which are more than 50 billion dollars in assets. The smaller banking companies should be overseen by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. (FDIC). However, the proposal has been turned down and met with resistance from many quarters including the Fed itself.
The financial reforms proposals, most of them spearheaded by the Senate Banking Committee have been looking to institute policies and regulations outside the dominion of the Federal Reserve, which has been met with severe criticism for the bailouts of the large bank holding companies last year. Bernanke speaking at the same event, also said that the bailouts of the large financial companies are ‘unconscionable’ and should be avoided in the future.
Dodd had also presented a plan to allow FDIC to liquidate the large companies after they have been declared insolvent. Bernanke too supported the concept of ‘living will’, which would be a large company’s well laid out plan to liquidate itself in the event that it becomes insolvent. All companies should be ready with such a plan for quick and efficient resolution preventing messy situations like those witnessed last year.