Reshaping the Fed: Historic Role Clouded by ‘Systemic-Risk’ Bill

The U.S. House  has approved the so-called systemic-risk bill that supporters claim will put an end to “too big to fail” financial firms with the creation of an inter-agency oversight council. 

It would also mark the first reshaping of the Federal Reserve’s role since its creation 96 years ago.

The Fed will serve as the agent to the council, under the proposed law. The Senate is working on its own version of financial oversight reform.

The House legislation, approve Dec. 11,  also contains a controversial amendment that grants the investigative arm of Congress the authority to audit the Fed “to provide greater transparency to Fed facilities and actions.” It is unclear whether the Fed’s vital monetary policy decisions will be included in the audits. The amendment was championed by Rep. Ron Paul, R-Texas, noted for his years-long support of abolishing the Fed.

It would mark the first such audits of the independent institution since its creation in 1913.

The Fed, the nation’s primary banking regulatory agency, has been a favorite target of legislators critical of its handling of the financial crisis, and subsequent bailout programs. The Senate is considering a financial oversight bill of its own that goes even further in stripping the Fed of it’s traditional regulatory authority.

Beyond the audits, the House systemic-risk bill further chips away at the Fed’s long-held muscle.

The bill significantly restricts the Federal Reserve’s use of “section 13(3) authority” to, in effect, bailout or lend to failing financial institutions.

“Use of this authority will require approval by two-thirds of the members of the Council and the consent of the Treasury Secretary after certification by the President that an emergency exists,” the House bill states. “This authority may not be used to provide assistance to individual companies, and Congress will be able to disapprove further use of the authority.”

To a much limited extent, the lefover “bailout” authority in the House bill would be transfered to the Federal Deposit Insurance Corp., which may extend “Emergency Financial Stabilization” loan guarantees to solvent banks and financial companies only in a liquidity crisis.

The loan guarantees will result in a government payout only if a guaranteed loan defaults, but will be funded by fees paid by financial companies that request guarantees.

In a newspaper opinion column on Sunday, Fed Chairman Ben Bernanke fired back at critics and staunchly defended the Fed’s actions during and after the financial markets crisis. He said current laws under consideration could threaten the stability of the U.S. econommic recovery.

“…Congress is still in the midst of considering how best to reform financial regulation,” Bernanke wrote. “I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions…These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.”

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