Federal Reserve chairman Ben Bernanke feels that to avert a possible threat to the financial system, the Fed has to supervise banks of all sizes.
He told this to the community bankers on Saturday as the central bank is in danger of its powers being curtailed.
“Because of the remarkable diversity of the U.S. financial system, a supervisory agency that focused only on the largest banking institutions, without knowledge of community banks, would get a limited and potentially distorted picture of what was happening in our banking system as a whole,” the Fed chairman told bankers at the Independent Community Bankers of America conference in Orlando.
The Fed’s oversight will be restricted, as its authority to conduct on-site examinations will be limited to 35 large banks with $50 billion or more in assets. So Bernanke wants the smaller banks problem to come in its fold too.
According to a proposal by Senate Banking Committee Chairman Christopher Dodd, D-Conn, Fed’s authority to oversee hundreds of small state-chartered banks will be removed in the near future.
Now, the proposal says that Federal Deposit Insurance Corp will be the federal regulator of those institutions.
Meanwhile, Dodd is planning to have senators on the banking committee vote on the proposal next week and then the bill will be made into legislation after getting it approved by the Senate.
Many experts feel that the central bank has not managed to notice the problems that has been growing with financial institutions and now should concentrate on how to conduct the monetary policy instead and not supervise banks.
“It seems that when the Fed is responsible for monetary policy and bank supervision, its performance in both suffers. Macroeconomic issues cloud supervisory judgments, thereby imperiling safety and soundness,” Rep. Spencer Bachus, R-Ala., told Bernanke at a House Financial Services Committee hearing on Wednesday.
However, Bernanke counters, “to better understand the full range of financial concerns and risks facing the country, such as the current difficult problems in commercial real estate lending and the impediments to small business lending.”
At this moment the Fed supervises about 5,000 bank holding companies and approximately 850 smaller banks.
Meanwhile, Bernanke’s views were supported by none other than Paul Volcker, who is the head of President Barack Obama’s economic advisory panel.
According to Bernanke, the Fed’s experience heads are very important in maintaining financial stability.
“As a group, community banks are also important to the nation’s financial stability, a particular focus and responsibility of the Federal Reserve,” he said.
Though, the current crisis is not much to cause crease lines but, the Fed chairman feels it can definitely escalate into a big one similar to the thrift crisis and the Great Depression.