Federal Reserve independence is also necessary for regulating banks

The Federal Reserve is one of three regulators keeping an eye on the country’s banking sector.

Hilary Allen, a law professor at American University, said the Fed focuses on financial stability: “Essentially that banks don’t take too many risks and blow up our economy in the process.”

That includes setting capital requirements for banks and also running stress tests to ensure banks can handle a downturn, Allen said.

”They go in and they examine banks, they look at what kinds of assets they’re investing in, they look at how they’re funding their investments. They look at how banks are managing their liquidity,” she said.

The goal here is to ensure that the banking system is resilient, said Kathryn Judge, a professor at Columbia Law School.

“So that way we have a financial system that’s able to provide the credit and services that everybody needs today, but it will also be in a position to provide that credit and those services when things go wrong,” she said.

Judge says regulations can impose costs on banks. That’s why she said regulatory independence is important.

But if the Federal Reserve were to lose that independence, “You could imagine a future scenario where a president says, ‘Look, I’m going to try to remove a governor who was appointed by somebody from the other political party. But I’m not doing it because I disagree about monetary policy, it’s that this person is furthering a regulatory agenda, with which I fundamentally disagree,’” said Judge.

Judge says there are several factors that have been eroding regulatory independence already.

The Federal Reserve has taken steps that align with the Trump administration to roll back regulations, said Allen.

“We’ve seen a commitment to cut supervisory and regulatory staff at the Federal Reserve by 30%. We’ve seen capital requirements be reduced for the largest banks in particular,” said Allen.

Allen says if the Fed were to lose its independence she’d expect even more regulatory rollbacks.