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Subcommittees Team Up to Examine the Relationship Between Prudential Regulation and Monetary Policy at the Federal Reserve

Washington, Sep 12 -

The Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Monetary Policy and Trade held a joint hearing today that examined the relationship between prudential regulation and monetary policy at the Federal Reserve. The main goal of the hearing was to determine whether these responsibilities complement or conflict with each other, and how they might be organized more effectively.

“Monetary policy and financial regulation play foundational roles in the economic opportunities that can and should be available to every American household.  However, during today’s hearing we heard that the Federal Reserve’s regulatory powers take away from its ability to conduct sound monetary policy, make the problem of ‘too big to fail’ worse, and that the Fed’s regulatory arm requires more oversight from Congress.  To build a more vibrant economy for all Americans we must make sure that our institutions for monetary policy and financial regulation compliment rather than conflict with each other.” said Monetary Policy and Trade Subcommittee Chairman Andy Barr (R-KY).

“Since it became law in 2010, Dodd-Frank has rewarded the Federal Reserve with sweeping regulatory powers despite the Fed’s contributions to the last financial crisis,” Financial Institutions and Consumer Credit Subcommittee Chairman Blaine Luetkemeyer (R-MO) added. “Financial institutions operate in a world of ambiguous guidance and aggressive enforcement. There is a near unanimous feeling that document productions fall into a black hole, with the Fed providing little to no meaningful feedback on supervisory issues. It is past time to take the power out of Washington and demand a reasonable financial regulatory structure. Thank you to the Monetary Policy and Trade Subcommittee Chairman Andy Barr for his continued efforts to ensure the Fed’s monetary policy decisions that impact the daily lives of Americans are made in a sound, unbiased manner.”  

Key Takeaways from the Hearing

• Dodd-Frank rewarded the Federal Reserve with sweeping new regulatory powers, despite the Fed’s contributions to the last financial crisis.

• The Fed’s added responsibilities as a regulator take away from its ability to conduct sound monetary policy.

• A more powerful Federal Reserve must also be a more accountable Federal Reserve – Congress must put the Fed’s regulatory arm on the normal congressional appropriations process or take the Fed out of the regulatory business entirely.

• Granting the Fed these sweeping regulatory powers – as Dodd-Frank does – makes the problem of Too Big to Fail even worse.

Topline Quotes from Witnesses

“Fed leaders often claim that their role as lender of last resort requires them to maintain regulatory and supervisory authority over banks. That is a fatuous argument ... there is no evidence of any synergy between monetary and regulatory policy.” Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School, Columbia University

“… [E]xperience has shown that some of the regulations and supervisory policies put in place in response to the financial crisis are holding back a more robust economic recovery. Loans to mortgage borrowers and small businesses illustrate this problem. The Urban Institute has estimated that over 5 million consumers were unable to obtain a mortgage loan between 2009 and 2014 because of a combination of new regulatory requirements and increased litigation risks faced by lenders and investors. Other studies have found that since the financial crisis small businesses have suffered low rates of formation and tepid growth due, in part, to regulations that make it difficult for small businesses, especially those with limited credit histories, to obtain credit.” Jim Sivon, Partner, Barnett Sivon & Natter P.C., on behalf of the Financial Services Roundtable