[E]arlier this week the federal banking agencies jointly issued a proposal to implement higher leverage ratio standards for the largest, most systemically important U.S. banking organizations. We have already finalized the rules on resolution planning and stress testing, and we are working diligently this year toward finalization of the remaining standards.

Let me just say a preliminary thing, which is I don’t think that the central bank should be equally independent in all of its functions. There are good reasons to have independence in monetary policymaking subject to a mandate or subject to objectives set by the democratic parliament or legislature. And we understand those reasons having to do with avoiding short-run political intervention in monetary policy and the like, but in many of its other activities — you know, for example, as a bank regulator, while we believe that bank regulators should be independent to make their own judgments about the quality of banks, I don’t think the Fed can presume to be any more or less independent in that function than is the OCC or some other bank regulator.

It’s just another aspect of our activities.

In our provision of payment services, there probably is no real case for independence, and it’s entirely appropriate for the Congress to ask questions about, you know, what we’re charging for those services and how we’re providing them and so on.

So I think it depends very much on the — on the aspect of the particular activity that the central bank is involved in.

So independence is a subtle concept. I think the — what it means varies according to the particular activity or particular function.

The question is: Should the Fed be monitoring its primary dealers? Only if the Fed is  the supervisor. In this case, the combination of a broker-dealer and a futures commission merchant imply that the SEC and the CFTC are the appropriate supervisors. They would not have qualified -- this company would not have qualified as a SIFI under the provisional guidance issued by the FSOC.

So there's no basis at this point for the Fed to be the overseer of that -- of those companies.

In response to a question about whether the failure of MF Global raised questions about the regulatory environment.

It would be unrealistic, even dangerous, to believe that asset bubbles, excessive leverage, poor risk assessment, and the crises such phenomena produce can all be prevented. The goal of the regulatory regime should be to reduce the likely incidence of such crises and, perhaps more importantly, to limit their severity when they do occur. This argues for fostering a financial sector capable of withstanding systemic stresses and still continuing to provide reasonably well-functioning capital intermediation through lending and other activities. The aim is not to avoid all losses or any retrenchment in lending and capital markets. It is to prevent financial markets from freezing up as they did in the latter part of 2008.

[Despite provisions in the Dodd-Frank bill,] the FDIC retains considerable discretion in the use of funds to limit losses to some creditors, and the Treasury can invoke orderly resolution for firms that have not been subject to enhanced regulation. The Fed also retains some discretionary power to lend to non-bank entities. This creates continued uncertainty about possible rescues, as well as gaps in our ability to provide clear, credible constraints on the safety net.

To be effective, regulation must be supported by strong supervision.

[G]iving all macroprudential responsibilities to a single agency risks creating regulatory blind spots, as--in the United States, at least--the skills and experience needed to oversee the many parts of our complex financial system are distributed across a number of regulatory agencies.

[P]olicymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy's underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy's longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

[A] provision in the Senate Banking Committee bill would restrict the Federal Reserve's supervisory authority to about 50 of the largest financial firms with $50 billion or more in assets. This would undermine the effort to end too big to fail, since the markets will likely interpret this provision as signaling that these firms are unique and will not be allowed to fail.

[E]rosion of Fed independence could result in a 1970s-style period of volatility. The consequences for the U.S. and the global economy would be large. No one would be served well by this outcome.

[T]he proposed financial reform legislation would significantly narrow the supervisory role of the Federal Reserve, so that it would oversee only the very largest institutions, most of which are headquartered in New York City. Congress established the Federal Reserve System in 1913 with 12 banks in a federated structure, like our political system, so that it would include regional perspectives to counterbalance the influence of Wall Street and Washington. To now narrow the Fed’s supervision to just the largest banks would be to devalue those broader perspectives. The Federal Reserve would no longer be the central bank of the United States, but only the central bank of Wall Street.

[T]he proposed financial reform legislation would significantly narrow the supervisory role of the Federal Reserve, so that it would oversee only the very largest institutions, most of which are headquartered in New York City. Congress established the Federal Reserve System in 1913 with 12 banks in a federated structure, like our political system, so that it would include regional perspectives to counterbalance the influence of Wall Street and Washington. To now narrow the Fed’s supervision to just the largest banks would be to devalue those broader perspectives. The Federal Reserve would no longer be the central bank of the United States, but only the central bank of Wall Street.

The Fed should remain involved with community bank regulation so that it has a view of the entire financial landscape. It is important that the Fed does not become biased toward the very large, mostly New York-based institutions.

I already mentioned that I am skeptical about using monetary policy to control financial exuberance. But without supervisory powers, there may be no choice.

Confining the Federal Reserve's supervisory role to only the largest firms will, I fear, inadvertently make the Federal Reserve the central bank to the largest firms while disenfranchising the other 6,800 banks.