Two prominent members of Congress, troubled by an enforcement action that the Federal Reserve imposed on large banks last year, are pressing for a big change in the way that Fed approves its crackdowns.
Senator Elizabeth Warren of Massachusetts and Representative Elijah E. Cummings of Maryland, both Democrats, are recommending that the Fed’s board of governors formally vote on significant enforcement actions. They made this request in a letter sent on Tuesday to Janet Yellen, the new chairwoman of the Fed.
The Fed’s board, made up of seven officials appointed by the president, rarely votes on supervisory actions. Instead, it usually delegates this authority to the Fed’s in-house staff. Ms. Warren and Mr. Cummings appear to believe that a board vote could increase the oversight of enforcement actions and create more accountability when problems arise with such actions.
Last year, substantial flaws emerged in a $9.3 billion settlement that the Fed and the Office of the Comptroller of the Currency struck with 13 financial firms over allegations that they mishandled foreclosures during the housing bust. A government report later criticized the way that regulators had designed the foreclosure review and the consultants who carried it out.
Ms. Warren and Mr. Cummings cited the foreclosure review in their letter to Ms. Yellen. “The board’s lack of direct involvement in the mortgage servicer enforcement action is particularly noteworthy given certain troubling aspects of the settlement,†they wrote.
“We have received the letter and plan to respond,†Barbara Hagenbaugh, a spokeswoman for the Fed, said in an email.
Ms. Yellen, who testified in the House on Tuesday and is scheduled to testify in the Senate on Thursday, has extensive experience in conducting monetary policy. But her track record as a bank regulator is much shorter, leading to concerns that she will pay less attention to supervising banks. During her confirmation hearing, however, she said that the Fed’s supervisory actions were as important as its monetary policy.
Still, in their letter, Ms. Warren and Mr. Cummings note that the Fed’s board regularly votes on decisions relating to interest rates and monetary stimulus, but almost never votes on supervisory and enforcement decisions. They said that the lack of board votes on regulatory matters suggested that the Fed had not put its supervisory responsibilities on an even footing with monetary policy.
“We respectfully request that the Fed revisit its existing delegation rules and require that the board retain greater authority over the Fed’s enforcement and supervisory activities in the future,†the members of Congress wrote.
In an earlier letter to the Fed, sent last September, Ms. Warren and Mr. Cummings asked for details on how decisions about regulatory actions were made.
In a reply in December, Ben S. Bernanke, the former chairman of the Fed, said that the agency’s staff often consulted with board to decide whether the staff could exercise its delegated authority when approving a regulatory action. But, in his letter, Mr. Bernanke added, “There are no written guidelines or procedures relating to this process.†Ms. Warren and Mr. Cummings seized on that in their letter sent on Tuesday. “Although Fed officials have indicated that there is informal consultation between those with delegated authority and certain board members, the process appears to be ad hoc,†they wrote.
Specifically, the two members of Congress recommended that the board vote on regulatory actions that result in penalties of $1 million or more, or when crackdowns require the removal of a bank officer or the introduction of a new management team at a bank.
Ms. Warren and Mr. Cummings also suggested that each board member be provided with the staff needed to weigh pending enforcement actions. “We believe that increasing the board’s direct role in overseeing enforcement and supervision would strengthen the Fed’s efforts to reduce systemic risk in our financial system,†they wrote.
