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Jesse Eisinger had a great column yesterday on the way in which the Fed is failing to embrace its crucially-important role as America’s top bank regulator. The Fed is “the most powerful banking regulator in the world,” he writes, but doesn’t act that way:

In the years before the financial crisis, the Fed was a miserable failure in that role, a creature of the banks, not a watchdog…

Under the giant Dodd-Frank package, the Fed was given an expanded regulatory role. The new consumer financial products regulator is housed within the central bank. The Fed also now officially oversees investment banks, which it had to rescue during the crisis. Congress broadened the Fed’s remit to cover nonfinancial institutions deemed “systemically important.” Congress created a new role, the “vice chairman of supervision,” to raise the prominence and importance of its responsibility. (It remains unfilled.) Perhaps most important, the Federal Reserve is supposed to play a major role in taking over big banks that fail.

Banking supervision has always been something of a backwater at the Fed. Within the institution, the sexy stuff is monetary policy. That’s where most of the resources and attention goes. The chairman and the board spend a disproportionate amount of their time on it, and monetary policy expertise largely dictates the selection of board members. Many question that mind-set.

It’s ridiculous that the job of vice chairman of supervision remains unfilled. Everybody knows the man who can, will, and should do the job: Dan Tarullo. He literally wrote the book on such things, and he’s already on the Fed board — so why the delay?

As Jesse quotes Mike Konczal as saying, “regulation needs accountability and transparency, and the Fed is just not set up to be accountable or transparent.” That needs to change — and the only way that the change is going to happen is if every board member is pushing for it to happen. Especially Ben Bernanke. He hasn’t started doing that yet, which is a bad sign. And even if and when Tarullo gets the bank-supervision job, he’s going to need to have a lot of institutional support in the rest of the organization if he’s going to be effective. So far, there’s precious little indication that he’s going to get it.

Source: When Will the Fed Start Caring About Bank Regulation?