Reassessing the Fed's Regulatory Role (United States Federal Reserve Board‪)‬

As we contemplate the raft of regulatory reforms currently being proposed, it is important not only to consider the content of regulation, but also its structure. In particular, it is important to ask how the role of the Fed as a regulator should change, and how the targets and the tools of monetary and regulatory policy should adapt to new regulatory mandates. For example, some reform proposals envision a dramatic expansion of Fed regulatory authority, while others do not, and some proposals envision the Fed's using monetary policy to prick asset bubbles, while others do not. This article considers the desirability of various Financial reforms, the proper future role of the Fed, and the proper use of monetary and regulatory policy tools in light of proposed regulatory reforms. What regulatory and overall policy structure would help us best achieve legitimate policy objectives? Reforms of regulatory content and structure should recognize that combining regulatory and monetary policy objectives within the Fed may be undesirable. The risks of adverse consequences from combining monetary policy mad regulatory authority within the Fed are real and threaten the effectiveness of both its monetary and regulatory policies. Experience and logic suggest that most regulatory and supervisory tasks should not be placed within the Fed. There are, however, legitimate arguments for charging the Fed with certain responsibilities--particularly, as a setter of time-varying macro prudential standards for the minimum capital or liquidity ratios of banks. If the Fed is charged with that role, however, it is important that the Fed exercise its responsibilities in a manner that reduces the risks of adverse consequences. The best means for doing so is for the Fed to adopt clear, transparent, and separate rules that guide its monetary policy targets and the variation over time in macro prudential standards.