Financial Crisis Inquiry Commission
Preliminary Staff Report
THE ROLE OF THE FEDERAL RESERVE IN BANKING SUPERVISION AND REGULATION
APRIL 7, 2010

This preliminary staff report is submitted to the Financial Crisis Inquiry Commission (FCIC) and the public for information, review, and comment. Comments can be submitted through the FCIC’s website, www.fcic.gov.

This document has not been approved by the Commission.

The report provides background factual information to the Commission on subject matters that are the focus of the FCIC’s public hearings on April 7, 8, and 9, 2010. In particular, this report provides information on the Federal Reserve and its regulation of the financial system, including its regulation of mortgage markets. Staff will provide investigative findings as well as additional information on these subject matters to the Commission over the course of the FCIC’s tenure.

The purpose of this preliminary staff report is to provide a brief overview of the role of the Federal Reserve in banking supervision and regulation. The first section describes the structure of the Federal Reserve and the extent of the Federal Reserve’s supervisory role as it stood at the beginning of the financial crisis. Section II describes the history of banking supervision and regulation in the United States, with a focus on the deregulatory environment that prevailed in the 1990s and early 2000s. Section III describes the Federal Reserve’s approach to systemic risk in the recent period. Section IV discusses Federal Reserve supervision of mortgage lending activity.

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The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

By SIMON JOHNSON

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

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Seminario Internacional “Regulación y empresas financieras en tiempos de crisis”

He seguido con deleite la presentación del profesor Andrew Powell (BID) y es muy ilustrativo sobre lo que está haciendo el mundo en relación a esta profunda crisis financiera. Es estimulante saber lo que está pasando en Estados Unidos, lo que hace la Comunidad Europea y los aportes que trae Basilea en su nueva versión sobre el tema regulatorio. Y naturalmente creo que todo es muy importante.

No quiero quitarle un ápice de interés a la necesidad de hacer profundas reflexiones en relación a lo que vendrá en el entorno regulatorio. Pero no resisto en decirles que ese no es el problema. El problema no es de regulación. Claro que es posible mejorar la regulación, pero centrar el debate en ese punto es desconocer que fue lo que causó la crisis.

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