Too Close for Comfort? Federal Reserve Oversight of Big Banks Under Fire

The Federal Reserve Bank of New York is facing growing criticism over its Wall Street oversight. Critics, including several high-ranking members of Congress, contend that it is too cozy with the entities it is charged with regulating. One of the top concerns is the so-called revolving door through which employees move to and from the big banks and its chief regulator. The New York Fed’s president, William C. Dudley, formerly worked as Goldman Sach’s chief economist.

While Dudley has taken a tougher approach to Wall Street supervision during his tenure, critics of the New York Fed question whether he is doing enough to reform the regulator’s culture and keep the big banks in check.

“More than six years ago, when regulators got too cozy with the banks they were regulating, we saw the cost in lost jobs, retirement savings and homes,” Senator Sherrod Brown stated in advance of a recent hearing of the Senate Banking Committee’s subcommittee for financial institutions. “It’s past time that the Federal Reserve shows — with actions, not words — that it will protect consumers rather than Wall Street.”

In the latest scandal, an employee with the Federal Reserve leaked confidential documents to his former colleague, who had left the regulator after seven years to work as a banker for Goldman Sachs. While both employees have reportedly been fired, the breach highlights the potential for serious conflicts of interest.

Earlier this fall, reports surfaced that the New York Fed gave Goldman preferential treatment when examining a deal that was described as “legal, but shady.” Audio recordings secretly captured by a former New York Fed examiner, Carmen M. Segarra, supported the reports.

The recent Senate hearing also focused on whether the New York Fed should have been more proactive in passing information to law enforcement officials about potential criminal activity. Lawmakers specifically cited a case in which Credit Suisse employees helped clients avoid U.S. taxes through secret offshore accounts, which scheme was uncovered through an investigation by the Senate rather than by financial regulators.

In response to the criticism, the Federal Reserve Board recently announced plans to evaluate the strength of its current oversight. The actions include a request that the inspector general examine whether bank supervision information was properly shared throughout the agency and whether an arrangement existed to ensure that the opinions of all its examiners are given sufficient weight. However, it is unclear if these efforts will appease critics.