Federal Reserves Role in Banking

In the wake of the financial crisis, the Obama administration had promised sweeping reforms that would prevent a similar crisis in future. One of the key areas of concern was supervision of banks, and the role that the Federal Reserve should play in that. But even after months of bickering on the issue, no clear solution seems to be in sight on which any kind of political consensus can be achieved.

In the original proposal to reform the financial system, it was suggested that the supervision of banks should not be the Fed’s responsibility any longer. According to Christopher Dodd, the Senate Banking Committee Chairman, the track record of the Fed in supervising banks is extremely poor, and it is time to relieve the Fed of this important duty if we don’t want to see a repeat of the financial crisis.

Dodd had suggested that the job of bank supervision should be consolidated with a single agency. The agency would be called the Financial Institutions Regulatory Administration. However, the proposal has attracted sever criticism, especially from the House Republicans. Dodd has been locked in tough negotiations with people from both parties to get some agreement on the issue, and all indications are that the plan would have to be modified significantly before it is approved.

The solution that is most likely to replace the radical reform suggested by Dodd is to keep only the largest financial companies under the supervision of the Fed. It has been suggested that any financial company that has assets in excess of $100 billion should remain in the Fed system. This would leave about 20 companies like Citigroup and Bank of America under the Fed. Some other alternatives are also being circulated. But there would be more clarity on the direction that the regulation would take only later this week when Dodd would make the suggestions public.

In the past few months, any debate on financial regulation has often led to heated arguments. The presence of lobbyists is not helping as it has led to added pressure on the lawmakers. The Fed itself has been trying to resist any major changes in its duties and the way it functions.

It would be serious test of the Obama administration to push forward its agenda in such a chaotic environment. The success of the administration would determine if the financial system will come out stronger from this turmoil or if we’ll see another major crisis.

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