By Ryan Tracy
WASHINGTON--The head of the Federal Reserve Bank of New York
defended the regulator's oversight of large financial firms amid
tough questioning from Senate Democrats, who accused the Fed of
kowtowing to the biggest banks.
William Dudley, the New York Fed's president appearing at a
Senate hearing, denied his institution has serious cultural
problems but said it could always improve on how it oversees big
Wall Street banks.
"The Federal Reserve has made significant changes to the
substance and process of supervision," Mr. Dudley told the Senate
Banking Committee. "As a result, the financial system is
unquestionably much stronger and more stable now than it was five
years ago."
The hearing came amid criticism of the Fed's oversight in the
wake of the 2008 financial crisis. In September, a former New York
Fed examiner said her desire to stand up to Goldman Sachs Group
Inc. was suppressed by supervisors. In October, the Fed's inspector
general said the New York Fed missed an opportunity to ferret out
risk-taking in J.P. Morgan Chase & Co.'s chief investment
office before it lost about $6 billion in the "London whale"
trading debacle.
"We're not seeing anything close to a rigorous accountability
for conflicts of interest and failures of oversight," said Sen.
Jeff Merkley (D., Ore.).
Mr. Dudley pushed back against that assessment, saying the New
York Fed hadn't failed in its oversight duties. He also addressed a
series of recordings made by the former Fed employee that painted
the Fed as a lax regulator, saying he disagreed.
"I don't accept the characterization that those tapes show the
Federal Reserve is not working correctly," Mr. Dudley said. "We
didn't repress [the issues in the tapes]. We didn't table them. We
investigated those issues."
Mr. Dudley's comments did little to appease Senate Democrats,
who at times expressed incredulity at his responses. In particular,
Sen. Elizabeth Warren (D., Mass.) lashed out at Mr. Dudley over lax
oversight, at one point suggesting Mr. Dudley should be replaced if
the New York Fed doesn't improve.
"Either you need to fix it, Mr. Dudley, or we need to get
someone who will," she said.
No Republican senators attended the hearing.
Sen. Warren, along with Sen. Sherrod Brown (D., Ohio), and
others questioned the New York Fed's independence, pressing Mr.
Dudley to explain why the New York Fed didn't stop certain risky
behavior, including the missed opportunity over the "London
whale."
An internal Fed recommendation to examine the J.P. Morgan office
involved in the trades "was not a recommendation that came up to me
to my approval," Mr. Dudley said. He said staffing was
overstretched in 2009, when the recommendation was made, and that
the bank had enough loss-absorbing capital to weather the
episode.
Victoria McGrane contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
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