CRS Highlights Federal Reserve Policy Issues for the New Congress
Commentary by Thomas Delaney
The Congressional Research Service ("CRS") highlighted policy issues for the new Congress relevant to Federal Reserve operations, including its role in granting master accounts, its independence from political influence, regulatory oversight of banks and the treatment of stablecoins in the financial system.
In its report, the CRS outlined how these issues intersect with broader financial stability concerns and congressional oversight.
On Fed Independence.
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The CRS described recent challenges to the Fed's independence, including public criticism from President Trump during his first term and bipartisan congressional scrutiny of its monetary policy decisions. Some policymakers propose replacing the Fed chair or vice chair before their terms expire—an unprecedented and legally untested action that the CRS report stated could be seen as undermining the Fed's independence.
On Bank Regulation.
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Basel III Endgame. The Fed, in coordination with other banking regulators, proposed the so-called "Basel III Endgame" rule, which would revise capital requirements for banks with over $100 billion in assets. Industry critics argue that increased capital requirements could limit lending, particularly in areas such as mortgage financing and fee-based banking activities.
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Bank Supervision and Recent Failures. The 2023 bank failures raised concerns about the effectiveness of the Fed's supervisory framework. Critics argue that the Fed's oversight failed to address warning signs, despite multiple supervisory findings against SVB prior to its collapse.
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Climate Risk. The Fed increased its focus on climate-related financial risks, particularly for large banks. Critics claim that such efforts exceed the Fed's statutory authority and could result in credit restrictions for certain industries.
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Cryptocurrency. The Fed has taken a cautious stance on traditional banks engaging in cryptocurrency-related activities, requiring case-by-case regulatory approval. Some policymakers argue that restrictive policies may unfairly limit bank participation in emerging fintechs.
On Payments and Stablecoin.
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Federal Reserve Payment Systems. The Fed operates multiple payment systems, some of which compete with private-sector payment networks, raising questions about the Fed's regulatory reach and market influence.
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Master Account Access. The Fed provides master accounts to banks and certain financial institutions, granting them direct access to Fed payment services. Congress mandated greater transparency in the master account process, requiring the Fed to publish a quarterly list of institutions that have applied for, been rejected for, or received access.
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Stablecoins and Financial Stability. Stablecoins—cryptocurrencies pegged to a reference currency like the US dollar—are increasingly viewed as potential payment instruments. The Fed has raised concerns over stablecoin run risks, regulatory gaps and systemic stability, particularly if stablecoins become more interconnected with the traditional financial system. In 2023, the Fed issued guidance requiring banks to seek regulatory approval before issuing stablecoins, effectively barring those operating on decentralized networks.
Commentary
Well before either of President Trump's elections, there were discussions at high policy levels about the need to streamline the Federal bank regulatory apparatus; potentially combining the agencies under the Treasury Department. Past proposals on regulatory consolidation have been met with strong objections by Fed staff (often accompanied by colleagues at the FDIC). Despite the furor over turf, arguments for independence around the levers of monetary policy are sound.
That said, there are persuasive arguments for consolidating the supervisory functions of the Fed under Treasury along with those of the FDIC, OCC, NCUA and potentially, the CFPB. Doing so (through legislation) would promote efficiency, in terms of eliminating redundancies in examination, legal and head office staff, while reducing operational inefficiency, such as the time it takes three agencies to approve one rule that overlaps their respective jurisdictions. It could also remedy the regulatory arbitrage that regularly occurs among entities subject to regulation by more than one federal banking agency, as well as statutory anomalies (why are savings associations different than banks and savings association holding companies different than bank holding companies).
Perhaps this report is, as its non-partisan title suggests, designed to support an assessment of the Federal Reserve only, but it would be far more meaningful if it was used by Congress as one information point to support a more fulsome assessment and reevaluation of the current regulatory structure that applies to federally regulated financial institutions. The current structure is the product of years of legislative bolt-ons that are mostly intended to protect bureaucratic fiefdoms rather than facilitating a coherent financial supervisory system.