Fed seeks ways to stop banks from taking too much risk
WASHINGTON -- The Federal Reserve is beefing up its supervision of the nation's largest banks and developing proposals to ensure that lavish executive compensation doesn't encourage excessive risk-taking, a Fed governor said Monday.
Daniel Tarullo, an expert on financial industry regulation, said Federal Reserve officials plan to scrutinize giant banks with an eye toward practices that might pose a risk to the entire financial system. The current crisis demonstrated that "systemic risk" posed by banks and other institutions judged too-big-to-fail was an unrecognized flaw in the nation's financial system.
"A major reorientation of our regulatory and supervisory system is needed to address head-on the problem of systemic risk," Tarullo, 56, told an audience at the Peterson Institute for International Economics.
His speech came as congressional Democrats readied proposed legislation that would entail the most sweeping overhaul in financial regulation since the 1930s. The Treasury Department is expected to make public its own proposed reforms next week.
A major question is what role the Fed will play in the new regulatory lineup. "Some on the Hill feel the Fed didn't do a very good job on bank supervision and bank regulation. There's some question about how much new authority to give the Fed," says economist Morris Goldstein of the Peterson Institute.
Tarullo discussed several elements expected to be part of an eventual reform package, including new powers for the government to wind down the operations of failing non-bank financial institutions. He also said Fed officials are drawing up proposals that would mandate consideration of "the riskiness of the firm's activities as well as the firm's financial performance" in executive pay packages.
Tarullo, whom President Obama appointed to the Fed in January, also gave a somewhat downbeat assessment of the economy's prospects. While most forecasters anticipate the start of an economic recovery before year's end, he said any turnaround will start from low levels of activity.
