The St. Louis Fed published an article by Julie Stackhouse explaining why bank supervision was a necessary part of the Fed if it was to carryout its central bank functions of monetary policy, financial stability management and discount window lending.

While this may have been true in the 1950s, it hasn’t been true since we entered the information age in the 1980s.

Let me take her arguments one at a time to show why bank supervision can and should be stripped from the Fed and transferred to the FDIC.

First, she argues Fed involvement in bank supervision is needed for formulating monetary policy.

Monetary policymakers depend on information provided by bank supervisors about banking market conditions, especially in times of financial stress, when determining the appropriate path of policy. …

More recently, supervisors assisted the Federal Open Market Committee (FOMC) in modeling the effects of rising credit losses to the financial system and the economy during the financial crisis. Further, Fed relationships with foreign supervisory bodies provided key insight into financial market conditions in other nations that would have material effects on domestic firms and the U.S. economy.

If banks provided the exposure detail transparency necessary to earn a label from the Transparency Label Initiative, the Fed would still have access to the underlying information it needs even if it didn’t have bank supervision responsibilities.  Like everyone else in the financial markets, the Fed could model credit losses using each bank’s exposure details.

Second, she argues Fed involvement in bank supervision is needed for managing financial stability.

The Fed’s supervisory expertise and authority have proven critical in the management of financial crises, from the 1970 bankruptcy of the Penn Central Railroad to the October 1987 stock market crash to the 2008 financial crisis and the Great Recession that followed. On-site examiners at major banks provided real-time analysis of funding needs and potential credit losses that allowed Fed officials to make more knowledgeable decisions about liquidity needs.

Again, if banks provided the transparency necessary to earn a label from the Transparency Label Initiative, the Fed would have the information it needed on bank funding needs and potential credit losses.

Third, she argues Fed involvement in bank supervision is needed for its lender of last resort role.

One of a central bank’s core responsibilities is providing liquidity to financial markets. …. To be able to extend credit to solvent firms that are illiquid, the Fed relies on intelligence it continuously gathers from the vast array of firms it supervises.

Again, if banks provided the exposure detail transparency necessary to earn a label from the Transparency Label Initiative, the Fed would have the information it needed both to assess the value of any collateral pledged as collateral and to assess the solvency of the borrowing bank.

Each of Ms. Stackhouse’s arguments for keeping bank supervision at the Fed comes down to a need for information.  Information that could be easily obtained if the banks provided transparency.

Moving bank supervision to the FDIC has the added advantage of reinforcing market discipline.  Investors know the FDIC has an incentive to protect taxpayers and the deposit insurance fund.  As a result, investors are more likely to use the information disclosed to earn the Transparency Label Initiative label to restrained risk taking by the banks.