Conflict of Interest at Root of Fed Oversight Woes

December 1, 2014 American Banker

Sen. Elizabeth Warren recently told New York Federal Reserve President William Dudley to man up on bank enforcement, warning him that if he won't, "we need to get someone who will." This phrasing makes it sound as if the problem with Fed oversight lies in the regulator's testosterone levels. It doesn't. The root of the problem is conflict of interest — not between Mr. Dudley and his former employer, Goldman Sachs, but between the Fed's dual role as regulator and enforcer.

The Fed's responsibilities have greatly expanded since the financial crisis. Whereas the Fed used to be comfortable as a behind-the-scenes regulator, we now expect it to be a public enforcer as well. As smart and accomplished as Mr. Dudley and his minions at the New York Fed might be, the strain of grappling with the near-impossibility of doing both jobs well within the same organization is showing. Not only are regulating and enforcing two different roles, doing both together means that the Fed is inevitably required to critique its own cooking. That's a conflict that often doesn't end well.

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