WASHINGTON, D.C. — On Friday, Senator Sherrod Brown (D-OH), Chairman of Financial Institutions and Consumer Protection Subcommittee, held a hearing on regulatory capture. The hearing followed media reports of secretly taped conversations between Federal Reserve Bank of New York officials disagreeing over the supervision of regulated entities.

On Thursday, the Federal Reserve announced that it would review its supervisory role over megabank institutions. 

“More than six years ago, when regulators got too cozy with the banks they were regulating, we saw the cost in lost jobs, retirement savings, and homes,” Brown said. “It’s past time that the Federal Reserve shows – with actions, not words – that it will protect consumers rather than Wall Street.”

Those testifying at the hearing included: 

  • Mr. William C. Dudley, President and CEO, Federal Reserve Bank of New York
  • Mr. David O. Beim, Professor of Professional Practice, Columbia Business School
  • Mr. Robert C. Hockett, Edward Cornell Professor of Law, Cornell Law School
  • Dr. Norbert J. Michel, Research Fellow in Financial Regulations, Heritage Foundation

Brown’s remarks, as prepared for delivery, follow.

Opening Statement of Senator Sherrod Brown

“Improving Financial Institution Supervision: Examining and Addressing Regulatory Capture.”

November 21, 2014

Six short years ago, we were in the midst of a massive financial crisis and the largest bailouts in American history.

The financial crisis was brought on as much by timidity and capture on the part of regulators and Congress as it was greed on the part of Wall Street.

The Financial Crisis Inquiry Commission concluded that Wall Street’s watchdogs, “lacked the political will—in a political and ideological environment that constrained it—as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”

One Federal Reserve supervisor told the FCIC that the nation’s largest bank was, “earning $4 to $5 billion a quarter … When that kind of money is flowing out quarter after quarter … it’s very hard to challenge.”

And so, the bank’s CEO famously concluded that, “as long as the music is playing, you’ve got to get up and dance.”

If we learned anything from the financial crisis, it is that we all have a responsibility to remain vigilant in our oversight of Wall Street’s risk-taking.

As we saw so clearly, short-term profits can quickly turn into long-term losses.

When the music stopped, the victims were not just Wall Street’s bottom lines; the victims were millions of Americans who lost their jobs and their homes.

Four years ago, we overhauled the nation’s financial regulations, handing a great deal of power to the Federal Reserve.

As one Federal Reserve official told the Subcommittee in 2011:

“Improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed, with risks identified early and promptly remediated. When we have significant concerns about risk management at complex firms, we are raising those concerns forcefully with senior management at the firms, holding them accountable to respond, and tracking their progress.”

Six years after the crisis, four years after Dodd-Frank, and three years after those comments, troubling reports suggest that it is back to business as usual at the Federal Reserve Bank of New York.

Former employees have come forward with troubling reports about the examination teams of JPMorgan and Goldman Sachs – two of the nation’s largest, most complex banks:

“Legal but shady” transactions.

Examiners engaged in an internal “struggle,” expertise that is “not valued,” and “low morale.”

Financial information that “ends up in a vacuum.”

An examiner told to “bite her tongue.”

An institution that is like a “giant Titanic, slow to move.”

A decision-making process that “grinds everything to a halt.”

Examiners being “stonewalled” by their supervisors.

Yesterday, we learned of another example of the revolving door at work: A New York Fed examiner leaving to work at Goldman Sachs and then receiving confidential information from his old colleague.

It is no wonder that Wall Street always appears to stay one step ahead of the sheriff.

It is bad enough when banks can capture the agencies that regulate them or the Congress that oversees those agencies.

But it is worse when they don’t even have to, because the agencies handcuff themselves or public servants attempt to curry favor with the companies that they supervise.

These recent reports should trouble any organization, but they are potentially catastrophic when the agency in question is responsible for four megabanks that alone account for more than $6 trillion in assets and more than 11,000 subsidiaries.

These banks operate in an average of 65 countries, and as a recent report by the Federal Reserve’s Inspector General on the “London Whale” incident reinforced, risky trades in a London office supervised by the New York Fed can reverberate back to the United States.

With all of its resources and its new authorities, is the Federal Reserve up to the task of regulating financial institutions that are so large and complex?

Or are these Wall Street banks simply too big to regulate?

I would be interested in hearing Mr. Dudley’s thoughts on this issue in particular.

Because the damage from the failure of any one of these institutions would not be contained to Wall Street – most of it will be felt on Main Street.

That is why it is so important that examiners, supervisors, and all regulators remember that their job is to serve the American People, and not the banks that they oversee.

And that is why the Federal Reserve must put its financial stability mission on an equal footing with monetary policy.

Congress in the Dodd-Frank Act created a Vice Chair for Supervision at the Board in Washington.

But by failing to even nominate someone to this position, the message that is being sent from the President, to the Board, to the supervisors on the ground, is that financial regulation is secondary.

According to my research, the Reserve Banks are still dominated by monetary policy experts, with only two of the 12 Federal Reserve Bank Presidents having any background in supervision.

We are here today because of issues raised by Carmen Segarra, and she has done a public service in bringing them to light.

The question for all of us here today is what we are going to do about them.

Will we simply talk about them and move on, or will we do something?

I thank the witnesses for being here to share their expertise and solutions with us.

And I thank Senator Toomey, his staff, the Committee staff, and the other members of the subcommittee for working with us on this hearing.

###