Senate Panel Considers New Constraints On Fed's Emergency Lending

Senate Panel Considers New Constraints On Fed's Emergency Lending

7:44am May 21, 2015

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Congress is taking on the Federal Reserve. The Senate Banking Committee today considers legislation that would put new constraints on the Fed's ability to react in a crisis. It also wants to look at restructuring the Fed and ease some regulations imposed on banks after the financial crisis. And this is just the opening skirmish. To find out more, we turn to David Wessel, as we often do. He directs the Hutchins Center at the Brookings Institution and is a contributing correspondent to The Wall Street Journal. Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Now, Congress passed a law - let's remind people - to reform regulation of the financial system five years ago, Dodd-Frank. Why is Congress revisiting this now?

WESSEL: Well, there's a sense that the government is being too tough on smaller banks and not tough enough on the very biggest banks. A lot of Republicans and Democrats want to ease the regulatory burden on smaller banks, reduce the frequency with which they're examined by regulators, for instance. And in both parties, there are some who want to break up the biggest banks. And they think the Fed, the Treasury, other regulators are still going to be too quick to bail out big banks when they get in trouble, and they're looking for legislative levers to prevent that.

MONTAGNE: So to be clear, those in Congress who are critical of the Federal Reserve and regulators think they are too tough on smaller banks, not tough enough on the bigger banks. But, David, let's talk about those legislative levers you just mentioned. Why is Congress now trying to exert more control over the Federal Reserve's ability to offer emergency lending? I mean, why now?

WESSEL: Well, I think why now because they think it's - they have the legislative oomph to do it. Elizabeth Warren, the Massachusetts Democrat, David Vitter, a Louisiana Republican, argued that if big banks know they can get cheap cash from the Fed in the next crisis, they'll have less incentive to manage their risks carefully. So they want the government to take over and shut down a bank that gets into trouble instead of bailing it out. And the Fed and its allies say, well, that's OK when things are calm. But in a panic, when the entire financial system is shaky, as it was just a few years ago, limiting the Fed's ability to lend readily to banks or other financial institutions would be catastrophic. So Ben Bernanke, the federal - the former Fed chairman, has said the Warren-Vitter bill was like shutting down the fire department in hopes of encouraging fire safety.

MONTAGNE: What then is the likelihood that any of these critics will get what they want?

WESSEL: Well, we'll know more after the Banking Committee markup today. But Chairman Dick Shelby has yet to line up any Democrats from his version. And if he can't get Democrats in committee, it's unlikely to get very far on the Senate floor. So far, Democrats want to stick together to shield Dodd-Frank from what they see as Republican attempts to weaken it, and that may be an overriding concern, even among those who are suspicious of the Fed and want to crack down on them.

MONTAGNE: Well, just a - quick before you go, David, I have - let's ask - let me ask you about interest rates. Any news on when the Fed will raise them?

WESSEL: Well, actually there is. The Fed, just yesterday, released minutes of its late April meeting. And they make very clear that the Fed is not going to raise rates in June, as been widely expected just a few months ago. The Fed watchers on Wall Street are betting on a September rate hike now. But if the recent weakness in the economic growth persists, it could be even later than that.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel of the Brookings Institution and The Wall Street Journal. Transcript provided by NPR, Copyright NPR.

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