really – about time… what about getting rid of it, all together
Secret ‘Triangle Document’ gives control of big-bank regulation to committee
(WSJ) WASHINGTON—The Federal Reserve Bank of New York, once the most feared banking regulator on Wall Street, has lost power in a behind-the-scenes reorganization at the nation’s central bank.
The Fed’s center of regulatory authority is now a little-known committee run by Fed governor Daniel Tarullo , which is calling the shots in oversight of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc .
The new structure was enshrined in a previously undisclosed paper written in 2010 known as the Triangle Document. Under the new system, Washington is at the center of bank supervision, exercising control over the Fed’s 12 reserve banks, much as the State Department exerts control over embassies.
The power shift, initiated after the financial crisis and slowly put in place over the past five years, is more than a bureaucratic change. It influences how the biggest banks on Wall Street are overseen and has begun to affect regulation in unanticipated ways across the Fed system.
During internal debates on a range of issues—including a Citigroup bid to raise its dividend a year ago and J.P. Morgan’s 2012 “London Whale” trading losses—New York Fed examiners have been challenged by Washington. At times they have been shut out of policy meetings and even openly disparaged by Mr. Tarullo for failing to stem problems at banks, according to current and former Fed officials involved the discussions.
“It was obvious that a lot in the U.S. regulatory system had not worked particularly well before the crisis,” Mr. Tarullo said in an interview. “It was equally obvious that there was going to need to be a rethink and reorganization.”
The new structure will be on display Thursday, when the Fed releases results of annual stress tests of big banks, a program run out of Washington by Mr. Tarullo’s group.
The Fed undertook the reorganization with little disclosure about what was taking place, but officials are now drawing attention to it. “The Federal Reserve is requiring more of large institutions,” Fed Chairwoman Janet Yellen said in a speech Tuesday that addressed the reorganization. “We are also requiring more of ourselves.”
The New York Fed, as it loses power, is adjusting its approach in some ways. It is pulling examiners out of offices at the banks they review and relocating them to a building near New York Fed headquarters.
At the center of the organizational shift are broad regulatory questions that have continued since the financial crisis: How to avoid getting too close to the banks, and whether hard data should trump human judgment in overseeing financial firms. This account of the changes is based on interviews with current and former Fed officials, bankers, board directors and lawyers, in addition to the Triangle Document.
Many of the firms that faced the gravest trouble in 2008—Bear Stearns, Fannie Mae, Freddie Mac, American International Group and Lehman Brothers—weren’t the responsibility of the New York Fed. But it has borne the brunt of the blame, as the central bank’s eyes and ears on Wall Street. And certain postcrisis incidents, such as the 2012 losses at J.P. Morgan Chase & Co., gave ammunition for those seeking to rein in the New York branch and its examiners.
It also came under scrutiny when a former employee, Carmen Segarra, told news organization ProPublica the New York Fed had gone easy on Goldman—and made tapes of internal discussions. The New York Fed said the facts didn’t support her assertions. Her wrongful-dismissal suit was dismissed, a ruling she is appealing. Even so, the case has led central-bank officials to explore whether they get adequate information from district banks on financial firms.
Officials in Washington say centralizing regulatory authority in D.C. gives the Fed a broader view of risks across the whole system and a more evenhanded oversight approach. As evidence of benefits from the stress tests Washington introduced, officials say the 50 largest U.S. banks increased their capital to $1.2 trillion by the end of the 2014 third quarter from $506 billion in early 2009.
There also have been strains. Some regulated banks say they are uncertain whether they can depend on feedback from front-line examiners. Others complain of an increase in paperwork and complexity that they doubt makes the system safer.
The organizational shakeout and criticism of the New York Fed have placed its president, William Dudley , in a vise: holding less authority to regulate banks even as he faces a bigger burden to prove the New York branch is up to such work.
Under the new structure, the New York Fed president isn’t directly involved in many of the central bank’s most important supervision decisions, including stress tests. Supervisors of bank examiners often report directly to Mr. Tarullo’s group.
Still, Mr. Dudley is taking heat. At a Senate hearing in November, Sen. Elizabeth Warren(D., Mass.) suggested there was a cultural problem at the New York Fed and told Mr. Dudley he needed to fix it “or we need to get someone who will.” Sen. Jack Reed (D., R.I.) has introduced a bill to subject New York Fed presidents to Senate confirmation. Dallas Fed President Richard Fisher recently said the New York Fed should have less sway in monetary-policy decisions.
Ms. Yellen is standing behind Mr. Dudley, who won respect inside the Fed for spotting emerging problems in markets during the financial crisis and is part of Ms. Yellen’s inner circle on monetary policy. “He’s done a fine job,” Ms. Yellen said in December. In an interview, Mr. Tarullo said he had a good working relationship with Mr. Dudley.
Mr. Dudley, in a prepared statement, endorsed the new structure. “I believe in a more integrated Federal Reserve System approach,” he said. “This has been an important part of our effort to ensure effective supervision of the nation’s largest financial institutions.”
Behind the scenes, Mr. Dudley, a former senior economist at Goldman, has been trying to restore the New York Fed’s dinged reputation…