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 Ranking representatives Maxine Waters of the House Financial
Services Committee and Al Green of the Subcommittee on Oversight and
Investigations asked the Government Accountability Office on Oct. 8
to launch a probe of "regulatory capture" and to focus on the New
York Fed, according to a letter obtained by Reuters.
In an interview, the congressional agency said it has begun planning
its approach.
The probe, which had not been previously reported or made public, is
the first by an outside agency into the perception that government
regulators are "captured" by and too deferential toward the bankers
they supervise, so that Wall Street benefits at the public's
expense.
Such perceptions have dogged the U.S. central bank since it failed
to head off the 2007-2009 financial crisis that sparked a global
recession. The Fed's biggest critics have since been Republicans
looking to curb its policy independence, but the request by
Democrats could cool its somewhat warmer relationship with the left.
"We currently do have some ongoing work looking at the concept known
as regulatory capture. We're in initial stages of outlining that
engagement," Lawrance Evans, director of the GAO's financial markets
and community investment division, said in an interview.
The agency will conduct "an assessment across all financial
regulators, and the Federal Reserve will be one institution," he
said.
It was unclear whether the majority Republicans on the House
committee, including Chairman Jeb Hensarling, backed the request
from the minority Democrats.
The GAO has not yet determined what agencies might be involved
beyond the Fed. The other main regulators that place supervisors
inside financial institutions are the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency.
The worry is that these so-called embedded regulators working under
the same roof as bankers will have clouded judgment as they watch
for risky and inappropriate behavior.
"We will cooperate with the GAO as its work on this report
proceeds," said Fed spokesman Eric Kollig.
The New York Fed, which acts as the central bank's eyes and ears on
Wall Street, has come under fire for a series of oversights and
perceived conflicts of interest in recent years. In one instance, a
former New York Fed examiner launched a wrongful termination lawsuit
and released some secretly recorded tapes that portrayed her
colleagues as being soft on Goldman Sachs.
That in part prompted a congressional hearing in late 2014 in which
Democratic Senator Elizabeth Warren warned New York Fed President
William Dudley to fix his institution's "cultural problem" or, she
suggested, he would have to go.
The New York Fed and OCC declined to comment on the lawmakers'
proposals, while the FDIC did not immediately respond.
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TESTY RELATIONSHIPS
In the letter, Waters and Green said they are particularly concerned
about reports of a "revolving door" between the New York Fed and the
banks, and "a reluctance to challenge" them. The lawmakers want the
GAO to use New York Fed actions between January 2008 and January
2015 as a "case study" for the broader investigation.
"Congress and the financial regulators must fully understand the
regulatory gaps and weakness that exist," they wrote, requesting an
analysis of six areas including the independence of regulators,
their ability to escalate concerns, and incentives they face to take
jobs at the banks they supervise.
The central bank, which gained more supervisory powers in the wake
of the crisis, has long defended its work but has been open to
adjustments.
A year ago, Chair Janet Yellen said the Fed takes "the risk of
regulatory capture...very seriously and works very hard to prevent"
it. Two internal reviews were launched and, in November, one
recommended improvements.
Yet the Fed's relationship with Congress has only grown more testy.
Republicans have repeatedly complained about opacity and a lack of
responsiveness to requests, and have pushed legislation that would
have the GAO "audit" the central bank's policy decisions - a move
that Yellen has strongly opposed.
Democrats have also grown more critical since the Fed raised
interest rates in December.
At Yellen's congressional testimony last month, Waters, usually a
staunch defender of the Fed chair, raised concerns over nearly $7
billion in interest the central bank paid to certain banks last year
to help it tighten monetary policy.
The GAO, which reports to Congress, already evaluates the integrity
of the Fed's operations including its supervision of some of the
world's biggest banks.
The agency is now determining objectives and selecting a team, Evans
said, and looking to "explore the issues in the request in a
balanced, objective, fact-based, non-partisan, non-ideological way."
Once the probe is completed, the GAO would report to the lawmakers
and give them 30 days before it publishes the findings.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)
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