WASHINGTON—The head of the Federal Reserve Bank of New York defended the regulator’s oversight of large financial firms amid tough questioning from Senate Democrats, who accused the Fed of kowtowing to the biggest banks.
William Dudley , the New York Fed’s president appearing at a Senate hearing, denied his institution has serious cultural problems but said it could always improve on how it oversees big Wall Street banks.
“The Federal Reserve has made significant changes to the substance and process of supervision,” Mr. Dudley told the Senate Banking Committee. “As a result, the financial system is unquestionably much stronger and more stable now than it was five years ago.”
The hearing came amid criticism of the Fed’s oversight in the wake of the 2008 financial crisis. In September, a former New York Fed examiner said her desire to stand up toGoldman Sachs Group Inc. was suppressed by supervisors. In October, the Fed’s inspector general said the New York Fed missed an opportunity to ferret out risk-taking in J.P. Morgan Chase & Co.’s chief investment office before it lost about $6 billion in the “London whale” trading debacle.
“We’re not seeing anything close to a rigorous accountability for conflicts of interest and failures of oversight,” said Sen. Jeff Merkley (D., Ore.).
Mr. Dudley pushed back against that assessment, saying the New York Fed hadn’t failed in its oversight duties. He also addressed a series of recordings made by the former Fed employee that painted the Fed as a lax regulator, saying he disagreed.
“I don’t accept the characterization that those tapes show the Federal Reserve is not working correctly,” Mr. Dudley said. “We didn’t repress [the issues in the tapes]. We didn’t table them. We investigated those issues.”
Mr. Dudley’s comments did little to appease Senate Democrats, who at times expressed incredulity at his responses. In particular, Sen. Elizabeth Warren (D., Mass.) lashed out at Mr. Dudley over lax oversight, at one point suggesting Mr. Dudley should be replaced if the New York Fed doesn’t improve.
“Either you need to fix it, Mr. Dudley, or we need to get someone who will,” she said.
No Republican senators attended the hearing.
Sen. Warren, along with Sen. Sherrod Brown (D., Ohio), and others questioned the New York Fed’s independence, pressing Mr. Dudley to explain why the New York Fed didn’t stop certain risky behavior, including the missed opportunity over the “London whale.”
An internal Fed recommendation to examine the J.P. Morgan office involved in the trades “was not a recommendation that came up to me to my approval,” Mr. Dudley said. He said staffing was overstretched in 2009, when the recommendation was made, and that the bank had enough loss-absorbing capital to weather the episode.
—Victoria McGrane contributed to this article.