On September 12, 2017, the U.S. House of Representatives’ Financial Services Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Monetary Policy and Trade conducted a joint hearing titled, “Examining the Relationship Between Prudential Regulation and Monetary Policy at the Federal Reserve.” A link to the videotaped testimony is located here. The Federal Reserve not only regulates and supervises various financial institutions, but also conducts monetary policy. The purpose of the hearing was to determine whether the Federal Reserve’s dual responsibilities of both regulation and monetary policy “complement or conflict” with one another. Witnesses included Dr. Charles Calomiris, a Columbia Business School professor of financial institutions, Dr. Stephen G. Cecchetti, the Rosen Family Chair in International Finance at Brandeis International Business School, and Jim Sivon, a partner at Barnett Sivon & Natter, P.C, who spoke on behalf of the Financial Services Roundtable. All three witnesses spoke in favor of reforming the way the Federal Reserve operates.
Providing a Republican view of the Federal Reserve, Chairman of the Monetary Policy and Trade Subcommittee Andy Barr (R-KY) opened the hearing by noting that he intended to “examin[e] whether monetary policy and financial regulation should be housed under the same roof, as it is in our Federal Reserve system, or if monetary policy and financial regulation could both work better with greater independence and independence.” He further remarked that “the Federal Reserve’s regulatory powers take away from its ability to conduct sound monetary policy, make the problem of ‘too big to fail’ worse, and that the Fed’s regulatory arm requires more oversight from Congress. To build a more vibrant economy for all Americans we must make sure that our institutions for monetary policy and financial regulation compliment rather than conflict with each other.”
Witness Jim Sivon testified that “experience has shown that some of the regulations and supervisory policies put in place in response to the financial crisis are holding back a more robust economic recovery.” As support, Mr. Sivon cited to an example involving mortgage loans: “The Urban Institute has estimated that over 5 million consumers were unable to obtain a mortgage loan between 2009 and 2014 because of a combination of new regulatory requirements and increased litigation risks faced by lenders and investors.” Mr. Sivon proposed several regulatory reforms the Federal Reserve could undertake to curb the drop in lending activity, including revising the comprehensive capital analysis review and stress testing rules.
Republican leadership recounted four takeaways from the hearing:
- The Dodd-Frank Act cast the Federal Reserve with expansive regulatory powers despite the Federal Reserve’s claimed contribution to the 2008 financial crisis.
- These expansive regulatory powers “makes the problem of Too Big to Fail even worse.”
- The Federal Reserve’s regulatory responsibilities result in fewer resources dedicated to conducting “sound monetary policy.”
- The Federal Reserve must be made accountable through the Congressional appropriations process if it is not relieved of its regulatory responsibilities.
The very existence of the hearing is significant because it threatens to upheave the Federal Reserve’s structure as we know it by divesting it of its dual responsibilities. LenderLaw Watch will report on any future developments.