Marc Labonte
Specialist in Macroeconomic Policy
Critics of the Federal Reserve (Fed) have long argued for more oversight, transparency, and disclosure. Criticism intensified following the extensive assistance provided by the Fed during the financial crisis. More specifically, critics have focused on the Government Accountability Office (GAO) audits of the Fed and the disclosure of details on the identities of borrowers and the terms of those loans.
Some critics downplay the degree of Fed oversight and disclosure that already takes place. For oversight, the Fed has been required by statute to report to and testify before the House and Senate committees of jurisdiction semi-annually since 1978. In addition, these committees periodically hold more focused hearings on Fed topics. Contrary to popular belief, GAO has conducted frequent audits of the Fed since 1978, subject to statutory restrictions. In addition, the Fed’s financial statements are audited by private sector auditors. The Dodd-Frank Act (P.L. 111- 203) resulted in an audit of the Fed’s emergency activities during the financial crisis, released in July 2011, and an audit of Fed governance, released in October 2011. The effective result of the audit restrictions remaining in law is that GAO cannot evaluate the economic merits of Fed policy decisions. In the 112th Congress, H.R. 459, H.R. 1496, and S. 202 would remove all statutory restrictions on GAO audits. The House passed H.R. 459 on July 25, 2012.
For disclosure, the Fed has publicly released extensive information on its operations, mostly on a voluntary basis. For example, it has long released a weekly summary of its balance sheet. The expanded scope of its lending activities during the financial crisis eventually led it to release a monthly report that offered more detailed information. Historically, the Fed had never released information on individual loans, such as the names of borrowers or amounts borrowed, however. In December 2010, as a result of the Dodd-Frank Act, the Fed released individual lending records for emergency facilities, revealing borrowers’ identities. Going forward, individual records for discount window and open market operation transactions will be released with a two-year lag. In addition, Freedom of Information Act lawsuits filed by Bloomberg and Fox News Network resulted in the release of individual lending records for the Fed’s discount window.
Although oversight and disclosure are often lumped together, they are separate issues and need not go together. Oversight relies on independent evaluation of the Fed; disclosure is an issue of what internal information the Fed releases to the public. Contrary to a common misperception, a GAO audit would not, under current law, result in the release of any confidential information identifying institutions that have borrowed from the Fed or the details of other transactions.
A potential consequence of greater oversight is that it could undermine the Fed’s political independence. Most economists believe that the Fed’s political independence leads to better policy outcomes and makes policy more effective by enhancing the Fed’s credibility in the eyes of market participants. The Fed has opposed legislation in the 112th Congress removing remaining GAO audit restrictions on those grounds. The challenge for Congress is to strike the right balance between a desire for the Fed to be responsive to Congress and for the Fed’s decisions to be somewhat immune from political calculations. A potential drawback to greater disclosure is that publicizing the names of borrowers could potentially stigmatize them in a way that causes runs on those borrowers or causes them to shun access to needed liquidity. Either outcome could result in a less stable financial system. A potential benefit of publicizing borrowers is to safeguard against favoritism or other conflicts of interest.
Date of Report: August 3, 2012
Number of Pages: 14
Order Number: R42079
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