“Wing-Nuts” to Put Squeeze on FRB, FedFin Concludes

Late last week, FinServ Chairman Hensarling (R-TX) announced an “aggressive” program dubbed the “Federal Reserve Centennial Oversight Project.”  As we noted in our initial assessment, FedFin thinks Rep. Hensarling has turned to this matter because it provides a platform from which to advance an array of views on financial regulation, as well as bring up FRB-reform proposals long advocated not only by conservative Republicans like Rep. Hensarling, but also by populist Democrats long fearful of the FRB’s power and what they see as undue closeness to big banks.  This coalition – one between very conservative Republicans and very progressive Democrats (as well as populists on both sides of the aisle – is sometimes called the “wing-nut” coalition by those in it as a term making clear how far each side of the coalition is from the middle. Next year, FinServ and the Monetary Policy Subcommittee under Rep. Campbell (R-CA) will hold a series of hearings that will culminate in what the chairman expects to be sweeping legislation.  The action plan here is to hold hearings and issue research reports, culminating in a committee mark-up in the fall.  Much under discussion will, FedFin forecasts, put the FRB under intense political pressure, especially with regard to its ongoing prudential and systemic-regulatory roles.  This will likely lead it under a new chair, Janet Yellen, to be as firm as possible with the largest banks to shore up the central bank’s ties with Democrats in the House and Senate.  FedFin expects the biggest threat to the FRB in terms of viable legislation to be a rewrite of its lender-of-last-resort powers, possibly constricting these to the point at which current swap agreements with other central banks must be withdrawn.  This report assesses this issue, as well as the other demands sure to be made of the central bank as the House effort gets under way early next year. Chairman Hensarling has previously made repeal of Dodd-Frank’s systemic-regulatory framework his top priority.  However, facing a year of inaction on his side of the aisle and opposition in the Senate, he has realigned his legislative priority to an issue that both stands a better chance of meaningful action and provides a forum for continued attention to the too-big-to-fail issue.

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