[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.

I don't think that's the right way to go. I think we want to maintain accountability through the Board of Governors which then oversees the system and that is really the appropriate way for us to be accountable to the Congress, which we will be. We want to be completely open and transparent to the Congress on all financial matters but we do need to maintain our independence on our policy decisions.

In response to a question about the proposal to make the FRBNY president a political appointee.

Once, again, we've issued guidance to the banks about encouraging lending to small businesses and have trained our own examiners to take a balanced perspective, that they not over-penalize loans to small businesses. And we are trying to get as much feedback as we can. For example, we have inserted questions in the NFIB survey to get back more information from small businesses about their credit experience. And currently our Reserve banks around the country are holding meetings with small businesses, banks and community development groups to try to understand better what the issues are and how we can improve small business lending.

In response to a question about the Fed's efforts to stimulate small business lending

Some observers argue that the financial reform agenda should include changes in the role and governance of the Federal Reserve...   I know it might sound self serving for a Fed insider to object to such changes, but I believe such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability...  The governance of the Federal Reserve System balances accountability, with ultimate authority resting in Washington, and independence, with the participation of non-political leaders from throughout the country.  While the performance of our economy in the last two years has clearly been unsatisfactory, and policy mistakes may have contributed to our problems, the Fed's balanced, hybrid governance structure has, I believe, given us a good record over the better part of three decades. Disrupting that balance would pose another long term challenge for our economy.

This mix of private and public governance makes the Federal Reserve System uniquely American. It provides a valuable form of checks and balances — between centralization and decentralization, between the public and private sectors, and between Wall Street, Washington, and Main Street — all to ensure that policy decisions are balanced and independent. I might add that the Fed receives no government appropriations from Congress.

[T]he Federal Reserve System has a characteristic that is somewhat unique among central banks of the world. The system has a decentralized structure whereby regional, independent Reserve Banks, under the broad supervision of politically appointed governors in Washington, D.C., jointly set policy.

This decentralized structure, in my view, greatly enhances both the independence of the system and its transparency.

The 12-bank system, as I've said many times, is absolutely essential to having an effective central bank. … The banking activities in the Midwest, in our region, are in many ways different than what you're going to find in Manhattan or in California. And having a reserve bank that understands not just its banking but the businesses that are unique to this region -- we're an agricultural region, we have a lot of energy in this region -- I think, is absolutely essential to the policymaking process as I go back to Washington and participate in that and communicate about it, and as I deal with commercial banks here, community banks or regional banks and businesses.  So -- and I've told people, in 1913, when this institution was organized, there was not an operational need for 12 banks.  That was a very important part of bringing consensus of support around the central bank and improving the communications of that central bank. It hasn't changed one iota. I would say, if you look at these times, it's probably more important than ever.

Congress created the Federal Reserve System with independent regional Reserve Banks and a Board of Governors in Washington that provided checks and balances — checks and balances between centralization and decentralization, checks and balances between the public and private sectors, and check and balances between Wall Street and Main Street — all to ensure that policy decisions were balanced and independent.

Congress also wanted a central bank accountable to Congress, yet not subject to undue political influences. That is why Congress chose to make the Fed independent from the Treasury Department and the administration; why Fed Governors have 14-year terms; why the 12 Reserve Banks are structured more like banks than like government agencies; and why Reserve Bank employees, officers, and directors are generally restricted from engaging in political activities.

[T]he structure of the Federal Reserve System also is not the problem, as has been recently suggested.  It would be a sad irony if the outcome of a crisis initiated on Wall Street was to result in Wall Street gaining power at the expense of the other parts of the country.  The 12 Regional Federal Reserve Banks that make up the Federal Reserve System were established by Congress specifically to address the populist outcry against concentrated power on Wall Street.  Its structure reflects the system of checks and balances that serves us well at all levels of government, and it is the reason I am here today able to express an alternative view.

It is well-known that the 12 Reserve Banks, along with their branches, play an important role in giving the Federal Reserve a truly national perspective on issues related to monetary policy and banking.  But they also conduct important research to help the Federal Reserve and others understand the underlying issues for those with low incomes and those who are underserved in the area of financial services.

For Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, chocolate isn't as sweet as it used to be: The cost of almost every ingredient has gone up. ``Commodities across the board have pressured us,'' said Bryan Merryman, the chief financial officer of Rocky Mountain Chocolate Factory Inc., as he led Hoenig on a two-hour tour of the company's Durango, Colorado, factory this week. ``There are a lot of pressures in our system that we haven't seen before.''...``When you see a business like this one, where everything it uses has been accelerating in price, you see what it does to a business person,'' Hoenig, 61, said. The July 15 visit ``reinforced the way I think, because I'm on record as being concerned about inflation,'' he said.
...
Anecdotes like the ones gathered at the Rocky Mountain factory make their way into the Fed's so-called Beige Book report and are a part of a give-and-take process of gathering and sharing information, Hoenig said. ``The Fed is not just a Washington-centric institution,'' he said. ``It's an institution that has 12 regional banks reaching out for information and sharing information with citizens.''...``What the reserve banks hear from their contacts can provide the Fed with an early warning of changes that may not show up in the published statistics for several weeks or even months,'' said Al Broaddus, former president of the Richmond Fed.

As reported by Bloomberg News.

MR. LACKER. Yes. I notice that in chart 18, in your TIPS-implied average inflationary plot to the ten-year horizon, you omit the Markets Group’s estimate. Is that because of skepticism on your part that leads you to judge it as inferior or an overabundance of humility? [Laughter]

MR. DUDLEY. The latter, of course. [Laughter]

MR. LACKER. It does, of course, show a slightly different trend, right?

MR. DUDLEY. It actually has increased a bit. But I have consistently shown just the Barclays and Board measures over the past few months, so this is not “pick and choose.”

Nationally, 278 private citizens--including business people, bankers, nonprofit executives, and community, agricultural and labor leaders--serve on the boards of our 12 Banks and their Branches. These individuals provide us with extensive and current information about economic conditions from a unique local perspective. Often, they provide an early warning of shifting economic conditions before they show up in official government statistics. I commend them for their service to both the central bank and our nation.

As the Federal Reserve builds on  its consumer protection efforts in order to mitigate foreclosures for current homeowners, we are also concerned about the impact current mortgage market problems are having on individual communities.  The challenges of rising foreclosures are significant at the state and local level and the nature of the problem varies by location.  Through its structure, the Federal Reserve System is attuned to local issues, which both informs its national policymaking and allows for responses tailored to local conditions.