WASHINGTON — Just five months ago the Federal Reserve System seemed on track to lose oversight of most of the financial institutions in its scope, which would have almost certainly led to a consolidation of the 12 banks and reshaped its mission.
On Wednesday, however, that threat vanished as the Senate voted 90 to 9 to adopt an amendment to keep the Fed's current authority over 850 state-chartered member banks and 5,000 holding companies.
The turnabout is remarkable even for Washington, where political fates often change faster than the weather.
Far from serving as the fall guy for the financial crisis, the central bank will emerge with its existing powers intact and enhanced authority over systemically risky companies if the current Senate bill becomes law.
It was not just a victory for the Federal Reserve Board, but for community bankers, who lobbied fiercely during the past few months to sway opinion in the Senate, and the Reserve Bank presidents, several of whom launched a personal and public relations blitz to preserve their turf. "We just had a good argument at the end of the day," said James Bullard, president of the Federal Reserve Bank of St. Louis. "It's not a good idea to separate the Fed from Main Street. It seems like it resonated with a lot of legislators."
Bullard's district in particular had a lot to lose if the bill by Senate Banking Committee Chairman Chris Dodd had not been amended. Dodd had proposed to strip the Fed of supervision over all but the largest 55 holding companies. Such a change would have drastically reduced the number of institutions each of the 12 banks oversaw, and left two — St. Louis and Kansas City — with no companies to regulate.
In pleading their case to legislators, the bank presidents argued such a move would cripple the central bank's ability to conduct monetary policy, leaving it without a window into community banks and concentrating all of its efforts just on the largest institutions.
"It would have been a terrible blow to Main Street America," said Cam Fine, president of the Independent Community Bankers of America, which was instrumental in garnering support to change the bill. "Instead of having the central bank of the United States, we would have a central bank of Wall Street."
On the Senate floor Tuesday, Sen. Kay Bailey Hutchison, R-Texas, the amendment's author, also made that case.
"If you take the Federal Reserve supervisory authority away from all of those community banks around the country … the regional banks no longer have input about what's going on in the smaller communities in our country," Hutchison said.
"You're going to have 'too big to fail' in reality, and you're also going to have a monetary policy that is going to cater to the big financial institutions."
A wide range of parties ultimately felt threatened by the Fed's removal as a banking examiner. Bankers feared they would be forced to switch to a new regulator, or have other agencies — the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency — suddenly serving as supervisors of banking holding companies.
"The last thing bankers wanted was a new set of examiners or regulators," said Richard Fisher, president of the Federal Reserve Bank of Dallas. "They're trying to do their business. They did not want a shift, they wanted to preserve the dual banking system."
State regulators too saw a potential problem. Supervisors like Richard Neiman, the superintendent of New York, feared the shift in regulators could cause some of the remaining large state-chartered banks to convert to national charters. That could have driven up exam fees for other banks and caused further charter changes.
The Hutchison amendment "ensures that large state-chartered banks will not convert to a national charter simply to avoid supervision by a third regulator," Neiman said. "Incentivizing such charter shopping would not only have undermined the spirit of reform, it would have undermined the dual banking system that has fueled our community banks and financial prosperity since the 19th century."
The landslide vote was a blow to those who had hoped to simplify the banking regulatory system. Under the bill, the Office of Thrift Supervision would be merged into the OCC, but otherwise the current fractured system would remain largely untouched.
Still, that was a good thing for many.
"It's a general rejection of a more centralized system to control and regulate a consolidated industry of a handful of banks at the expense of a system that has supported a regionally and locally diversified system," said John Ryan, the executive vice president of the Conference of State Bank Supervisors.
Although it is unlikely the bill will change on this issue before it is finally approved, not everyone was relieved, since it must be reconciled with the House reform bill that passed in December. Even so, that bill too would keep the Fed's existing powers intact and give it systemic-risk oversight, indicating a radical shift is unlikely in the final legislation.
"This has been a very difficult process, a roller coaster," Bullard said. "And frankly, it is not over yet. We still have to go to conference."