Fed Failed to Curb Flawed Bank Lending, Inspector General Says

Federal Reserve examiners failed to rein in practices that led to losses from excessive real estate lending at two banks in California and Florida that later closed, the central bank’s inspector general said.

Riverside Bank of the Gulf Coast in Cape Coral, Florida, “warranted more immediate supervisory attention” by the Atlanta district bank, Fed Inspector General Elizabeth Coleman said in a report to the central bank’s board. In overseeing County Bank in Merced, California, the San Francisco Fed should have taken a “more aggressive supervisory” approach, Coleman said in another report, also dated Sept. 9.

The findings follow criticism by lawmakers including Senate Banking Committee Chairman Christopher Dodd, who say the Fed failed to curtail flawed underwriting and other lending abuses that contributed to the collapse of the housing market. Another report by the Fed’s inspector general in June faulted the Atlanta Fed’s oversight of First Georgia Community Bank.

Congress is reviewing a U.S. Treasury proposal to give the Fed more power by making it the supervisor for large and interconnected firms that may damage the U.S. financial system in the event of failure. The Treasury plan is part of an effort to overhaul U.S. financial regulation.

“The Fed does not come out smelling like a rose,” said Gilbert Schwartz, former associate general counsel of the Fed board and now a partner at law firm Schwartz & Ballen LLP in Washington. “There are things that could have been done better.”

‘Perform Better’

Other regulatory agencies have also fallen short, he added. “The real question is if not the Fed, who would perform better? The best place is with the Fed.”

Esther George, acting director of the Fed’s division of banking supervision and regulation, agreed with Coleman’s findings in a letter posted with the reports on the central bank’s web site.