Fed is the main winner from Dodd-Frank bill: Meyer

The Federal Reserve has emerged as a clear winner in the finalised Dodd-Frank regulatory reform bill, Laurence Meyer, a former governor of the central bank's Washington-based board, told CentralBanking.com on Friday.

"The most surprising feature of the final product is that the Fed has emerged as the biggest winner," said Meyer, who is now the vice-chairman of Macroeconomic Advisers, a consultancy. "At the beginning, there was such hostility to the Fed. It didn't seem that they would end up expanding its role, given that they were threatening various encroachments, such as the audits of monetary policy. In the end, the Fed won just about everything."

In the bill put to the US Senate last November, Chris Dodd, the head of the chamber's banking committee, called for the supervisory functions of both the Fed and the Federal Deposit Insurance Corporation to be revoked, and consolidated under a new super-regulator, called the Financial Institutions Regulatory Administration. Lawmakers then relented, allowing the central bank to keep oversight of banks with more than $50 billion in assets, and in May, backtracked further, letting the Fed keep supervision of state-chartered banks with less than $50 billion in assets.

Meyer pointed out that the text now extends the Fed's oversight of systemically important institutions, from just bank holding companies, to all financial firms. "So we'll never get into a situation like we did in the last crisis, where systemically important firms like Merrill Lynch and Goldman Sachs are outside of the Fed's remit," Meyer said. "That's really important. The Fed is the only one that has the experience and resources to get this job done." While the central bank's retention of state chartered banks was not in and of itself crucial, it was a move that protected the structure of the Federal Reserve System and kept Congress at an arm's length, Meyer added.

The victory was an important one, Eric Pan, an associate professor at New York's Cardozo University, and an associate fellow at London's Chatham House, told CentralBanking.com. "You need an agency that is both the prudential regulator and involved in macroeconomic policy, and that's the Fed," he said, adding that this reflected developments in Brussels and London.

Consumer protection
In another u-turn, the final legislation houses the new Consumer Financial Protection Bureau within the central bank, a measure that had been vigorously opposed by Barney Frank, the chairman of the House Financial Services Committee. Meyer said placing the consumer protection bureau within the Fed was "an act of stupidity", and would "promote utter confusion" about the central bank's true influence on the area. "Consumer protection is not a core concern for a central bank. It takes away time and soaks up resources," he said.

Meyer noted, however, that the language used in the bill would mean, in effect that the central bank's involvement would be limited, literally, to housing the consumer protection unit, and paying for the facilities it uses. "In substance, the consumer body will be independent from the Fed- the director does not have to report to the fed chairman," Pan added. And while the new body took the right approach, by consolidating the consumer protection work carried out by a variety of agencies including the Fed, its success would ultimately depend on who was appointed to lead it, he noted.

Audit
The controversial ‘Audit the Fed' clause, which in itself has been watered down from original proposals, was the only area in which the central bank had not got exactly what it wanted. Under the final legislation, the Fed will be subjected to a one-time review of all of its emergency lending programmes since the onset of the crisis, and must disclose, with a two-year lag, information on loans it makes to lenders through its discount window, and details of its open market operations. "In principle, there is a stigma associated with using discount window facilities. However, it's possible that the two-year lag might dampen this somewhat," Meyer said. Pan agreed, adding that the discount window and open market operation audit was necessary as a counterbalance to the central bank's many expanded powers. "You can't give an agency that much more power without also expecting more transparency," he said.

The central bank will also no longer be able to bail out individual lenders without the approval of the Treasury secretary, or if the banks in question are insolvent. The Fed has never wanted to play this role, Meyer said, noting that there was potential to stray into quasi-fiscal activity. However, while the clause gives the appearance of ending too big to fail, in practice, it was unclear whether it would work, he said.

Grey areas
The bill, once signed into law, will still require more than 250 new rules to be made by 11 federal agencies. The upshot of this was that many ideas, as they exist in the text, could still fail to have any real effect, Pan, who has practiced as an attorney in Washington, noted.

The bill, which on Thursday garnered 60 votes in favour to 39 against in the Senate, will soon be signed into law by Barack Obama, the US President.