Fed officials warn against loss of bank oversight

WASHINGTON (Reuters) - Four top Federal Reserve officials chiefs urged Congress on Thursday not to strip the U.S. central bank of the authority to supervise small banks, saying they would lose an important finger on the pulse of the economy that helps them guide monetary policy.

A financial regulatory overhaul bill unveiled in the U.S. Senate this week would diminish the bank powers of the 12 regional Fed districts and leave some with no banks to oversee.

Three of the officials addressing a bankers' group on Thursday were presidents of regional Federal Reserve banks.

"It is a travesty," Thomas Hoenig, president of the Kansas City Federal Reserve Bank, told the group. "It is absolutely disenfranchising our relationship with a very important, hugely important, sector outside of Wall Street across the United States."

"It makes the central bank the central bank of Wall Street and not of the United States," he said.

Hoenig, along with president of the Cleveland Federal Reserve Bank, Sandra Pianalto, Richmond Fed chief Jeffrey Lacker, and Fed Governor Elizabeth Duke presented a united front against the proposal at a conference sponsored by the American Bankers Association.

Fed Chairman Ben Bernanke had presented a similar argument to lawmakers on Wednesday.

Hoenig said the legislation introduced by Senator Christopher Dodd on Monday, which would shift oversight of banks with assets of less than $50 billion from the Fed to other regulators, would remove all of the banks in his district from his bank's supervision.

Duke said the U.S. central bank's broad supervisory authority gives it a better understanding of the economy's condition and it would be a mistake to narrow that focus to only larger banks.

Duke said broad-based knowledge of banks' condition was "specially helpful" to Fed policy makers during the financial crisis when they had to respond quickly to changing conditions.

"So I would hate to see the Federal Reserve become focused too narrowly on the activities of just the largest institutions," she said in a separate speech.

The Fed system is composed of the board of governors in Washington and 12 regional banks around the country, including in New York. Regional Fed banks contribute to monetary policy decisions, supervise banks in their districts, and conduct economic research.

The bill unveiled by Dodd, chairman of the Senate Banking Committee, would expand the Fed's authority over larger banks and put some large non-bank financial firms under the Fed's watch. But it would give authority over smaller banks to the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency.

Hoenig told the bankers' group the vocal opposition from the Fed was "not driven by the idea of simply protecting our 'turf'," but instead was driven by a desire to serve the best interests of the nation.

Speaking at the same conference, FDIC Chairman Sheila Bair said her agency was not taking a position on Dodd's proposal.

The bank regulatory provisions are part of a broader bill to rewrite financial rules that Dodd is trying to push through the Senate. The House of Representatives passed its own bill in December, which would not strip the Fed of small bank oversight.

If the Senate approves a bill, it would have to be reconciled with the House measure.

Regulatory reform is a top priority for the White House after the worst financial crash in generations pushed the economy through a punishing recession. The Fed has come under extensive criticism for regulatory lapses that are seen as laying the groundwork for the crisis.

(Editing by Leslie Adler)