The government agency that watches over Wall Street came in for repeated rounds of criticism on Friday at a Senate hearing into its regulatory track record.
Many of the senators at the hearing were expected to be critical of the Federal Reserve Bank of New York, after recent reports cast doubt on the agency’s ability to rein in large banks.
William C. Dudley, the president of the New York Fed, defended the agency, but Senator Elizabeth Warren, Democrat of Massachusetts, at one point told him, “You need to fix it, Mr. Dudley, or we need to get someone who will.”
The president of the New York Fed is not chosen by Congress. And much of the stern questioning could be seen as the sort of grandstanding that plays well with those who want to limit Wall Street’s power or were harmed in the financial crisis of 2008. Even so, it will be hard for the Fed to ignore the anger directed at Mr. Dudley. The New York Fed is the public’s first line of defense against Wall Street’s excesses and abuses, and the discontent in Congress could build if more evidence emerges that suggests the New York Fed is not tough enough with the large banks it oversees.
The hearing was held by the Senate Banking Committee’s subcommittee for financial institutions, headed by Senator Sherrod Brown, an Ohio Democrat who is a strong critic of the big banks. On Friday, he immediately set a combative tone, asking Mr. Dudley, “With all its resources and its new authorities, is the Federal Reserve up to the task of regulating financial institutions that are so large and complex?”
At one point, Mr. Dudley responded to the criticisms, “I would not accept the premise that there has been a long list of failures at the New York Fed” on his watch.
The hard questioning did not provoke the New York Fed president, a former economist at Goldman Sachs, into any ill-advised comments. But at times, he gave answers that seemed to fall short of what the senators wanted to hear.
The hearing was set after reports in September by ProPublica and the radio program “This American Life” that were based on audio recordings by a former New York Fed examiner. Excerpts from the recordings appeared to show the New York Fed not being tough on Goldman Sachs over a deal it was pursuing with Santander, a Spanish bank. The former examiner, Carmen M. Segarra, attended the hearing, but was not among those called to testify. She declined to speak about her case, though a spokesman, Jamie Diaferia, said in a statement that she was disappointed not to have been invited by the Senate to testify.
The questions about the New York Fed intensified this week after The New York Times reported that a New York Fed regulator had leaked information to Goldman Sachs.
Senator Brown noted the report in his opening remarks. “Yesterday, we learned of another example of the revolving door at work: A New York Fed examiner leaving to work at Goldman Sachs and then receiving confidential information from his old colleague.”
The reports were among the factors that prompted Senator Warren to question Mr. Dudley’s leadership. “Is there a culture problem at the New York Fed?” she asked. “I think the evidence says that there is.”
On the audio recording, a New York Fed examiner said that the Goldman deal with Santander looked “legal but shady.” But on Friday, Mr. Dudley said that the New York Fed had concluded that the deal did not pose any risks to Goldman’s reputation.
Examiners questioned whether the deal was designed to make Santander look financially stronger than it actually was. Given that, Senator Warren asked whether the New York Fed reported the deal to the European banking authorities. Mr. Dudley said that it did consult the Bank of Spain, Spain’s central bank and Santander’s regulator. But when pressed by Senator Warren, he said that he did not know whether the deal had been reported to the European banking regulators.
Peter Greiff, a Santander spokesman, said afterward, “The deal was reviewed by supervisors in the relevant countries and publicly disclosed at the time.”
The New York Fed fired Ms. Segarra in 2012. She sued the Fed but this year a judge dismissed her suit.
She joined the New York Fed as part of a wave of hiring after the financial crisis. One of the aims was to bring in employees who might be expected to challenge the consensus thinking at the New York Fed. But in what appeared to be a comment on Ms. Segarra’s actions, Mr. Dudley said: “We definitely want people who speak up and express their views. But we also want people who are fact-based.”
Many of the senators’ questions centered on whether the New York Fed should have done more to pass on information to law enforcement officials to help detect crimes, like tax evasion. Senator Jeff Merkley, Democrat of Oregon, for instance, homed in on a case in which Credit Suisse, a Swiss bank, helped Americans dodge United States taxes. He asserted that the information for that case had come largely from a Senate investigation, not from information provided by regulators like the New York Fed.
“Our orientation is the safety and soundness of the firms we supervise,” Mr. Dudley said. He also disputed the notion that the New York Fed’s mission should be that of a police force. “It is not like a cop on the beat,” he said. “It’s more like a fire warden.”
That distinction angered some critics of the Fed.
“He said that he was not a bank cop; he will not like that pushed back in his face,” said Bartlett Naylor, financial policy advocate at Public Citizen, a consumer advocacy group. “They are supposed to be mindful of infractions.”
Perhaps as a defensive move before the hearings, the Federal Reserve Board, the Fed’s central body, announced on Thursday that it was going to review certain aspects of how it regulates banks. The Fed asked its inspector general to look into whether bank supervision information was properly shared throughout the agency. And it called on the inspector general to examine whether an arrangement existed to make sure that the opinions of all its examiners were heard. The moves come after the Fed was criticized for uncritical, consensus thinking.
“The review is a transparently political ploy that will probably backfire on the Fed,” said Dennis Kelleher, president of Better Markets, a group that lobbies for tougher financial regulation.