Whatever Warsh promises, the fate of these powers may well play out in the courts: language in Roberts’ opinion seems to leave open a challenge to Fed policies as unconstitutional, whittling away at its independent functions. Banks have already pushed the agency back in an early legal skirmish over stress tests. Leaving the Fed exposed to further legal risk that could end up tying its hands at a crucial moment just needlessly weakens the financial system.
Regulatory powers support policy and crisis management
Joint rulemakings with other agencies are nothing new, but the Fed has long treated other bodies as junior partners. The central bank takes a lead role in everything from setting capital requirements to stress-testing key firms. Through its 12 regional banks, it deploys thousands of examiners and regulators, many of whom are situated within the institutions they oversee.
These regulatory functions reinforce the Fed’s monetary policy functions by providing expertise and visibility throughout the financial system. This informs its use of various stabilizing mechanisms, from discount window funding to running down orderly liquidations. Just as importantly, it can use regulatory tools to strengthen confidence in the system in the wake of a crisis, a crucial step in the recovery from 2008’s nadir.
Supreme Court ruling leaves room for challenges to Fed oversight
WASHINGTON, July 16 (Reuters Breakingviews) - The Federal Reserve’s independence was only reaffirmed in part. In June, the Supreme Court nixed attempts by the Trump administration to eject governors from the central bank’s board. A caveat in the ruling, though, could shrink their remit: Chief Justice John Roberts’ opinion left ample room for lawsuits over regulatory and supervisory powers. As the nation’s lender of last resort, the Fed is expected to clean up inevitable financial messes. Any risk to its oversight role could leave the agency unable to step in before a mess becomes a catastrophe, or to fully contain the damage.
Warsh testifies amid Republican calls to split supervision from regulation
When new Fed Chair Kevin Warsh told congressional committees this week that banking regulation should be done “in concert” with other regulators, like the Federal Deposit Insurance Corporation, he was greeted by a chorus of Republican senators calling for the complete separation of these functions. “The bank supervision component should not enjoy that same level of non-scrutiny,” Wyoming Senator Cynthia Lummis told Warsh. Several members mentioned the San Francisco regional Fed’s failure to catch the problems at Silicon Valley Bank that led to the most significant run of lender failures since 2008.
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