Wall Street Journal - How to End the Fed's Rule-Making Secrecy

Op-Ed

By Scott Garrett

While many have raised concerns about the Federal Reserve's unprecedented monetary policies, there is comparatively less discussion of its regulatory activities--most of which take place in secret. This is especially problematic since the Fed was granted broad-ranging regulatory authority after the financial crisis, particularly in the Dodd-Frank Act of 2010.

Congress is all that stands today between the central bank's exercise of power over the financial system and the American people. So it is vital to ensure that the Fed is accountable to the people's representatives.

Transparency and accountability have not been hallmarks of the Federal Reserve. The Fed has spearheaded a barrage of new rules that will fundamentally transform our banking system, including a supplemental leverage ratio, liquidity coverage ratio, net stable funding ratio, foreign banking organization rule, and new risk-weighted capital requirements. But as the Fed's own website notes, the central bank has convened only five open meetings on rule-making during 2012 and 2013.

This situation requires reform, and to this end I will shortly introduce in Congress the Federal Reserve Accountability and Transparency Act. Its straightforward provisions will help open up the often opaque workings of the central bank.

Dodd-Frank created the role of vice chairman of supervision at the Federal Reserve--a position intended to increase accountability regarding the central bank's authority to regulate our banking sector. The president has not submitted a nominee to the Senate and the position remains vacant, although the Fed continues to make rules. As long as this vacancy continues, my proposal would require the responsibilities of the vice chairman--including testifying to Congress on all Fed rule-makings--to be assumed by the Fed's second-in-command.

Unlike most other rulemaking entities, the Fed is exempt from an executive order that requires regulators to assess the costs or economic impact of their regulations. Consumers and businesses will not be exempt from the higher banking and loan fees that Fed regulations may impose. My bill would require the Fed to assess whether the benefits of proposed regulations justify the increased costs for consumers and the potential loss of jobs.

The Fed can also improve its transparency in international negotiations. The Fed enters negotiations with our international partners without the benefit of comments from market participants about how any new agreements may affect U.S. competitiveness. For example, the Basel IIIaccord on capital standards and market-liquidity risk was negotiated primarily with global financial institutions in mind, and will impose additional burdens on small banks that do not have a systemic effect on the banking system. At the end of the day, international agreements can punish smaller banks in favor of their large global competitors.

My bill would require the Fed to publish a notice that details the subject, scope and goals of any international agreements and solicit comments from market participants ahead of negotiations. This mechanism--similar to that for bilateral investment treaties--would allow market participants a formal process to ensure that the concerns of institutions of all sizes are represented. The legislation would also require the Fed to provide relevant committees with details of the agreements before they are finalized.

Last April, after a Fed official testified before the House Financial Services Committee, it took the Fed six months to respond to the committee's written questions. This is not an isolated example. The Fed took more than four months to respond to committee questions for the chairman's February appearance. Such delays are unacceptable.

The Fed's current employee ethics requirements also should be strengthened. As the central bank's regulatory reach becomes increasingly intertwined into our capital markets, its employees should be subject to conflict-of-interest and financial-disclosure requirements similar to those of capital-markets regulators such as the Securities and Exchange Commission. My proposal would require certain Fed employees to disclose brokerage accounts and trading activities, prohibit investment in certain securities, require pre-clearance on trades, and ban trading on material nonpublic information.

In recent years the Fed's conduct of monetary policy has become more transparent, but its rule-making and negotiations with international partners remains a black box to the American people. It is my hope to foster greater accountability and transparency at the Fed and re-establish Congress's constitutional role in providing robust oversight of the central bank's regulatory reach.

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