World Bank calls for US Treasury to have more regulatory clout

The US Department of the Treasury, and not the Federal Reserve, should be handed greater regulatory authority, says World Bank president Robert Zoellick.

Speaking in Washington, DC ahead of next week's annual meetings of the World Bank and the International Monetary Fund in Istanbul, Zoellick questioned whether the Fed should be allowed to supervise systemic banking risks as well as operate monetary policy.

"In the US, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority," he told an audience at John Hopkins University. "My reading of recent crisis management is that the Treasury Department needed greater authority to pull together a bevy of different regulators. Moreover, the Treasury is an executive department, and therefore Congress and the public can more directly oversee how it uses any added authority."

Zoellick praised the role of central banks in reacting to the financial crisis, but said questions remain over significant failures of supervision and asset price inflation that contributed to it. "We have yet to see whether central banks can handle the recovery without letting inflation get out of control," he said.

Zoellick said the G-20 should act as a non-hierarchical forum for international economic co-operation, and that the World Bank, along with other global bodies, could help push through policy reforms, alert countries to issues and provide analysis. The World Bank president also warned world leaders to guard against complacency as the crisis wanes, calling for "a new level of international co-operation and co-ordination, including a new willingness to take the findings of global monitoring seriously".

In July doubts were cast over the Fed's ability to take over broad responsibility for systemic risk – in particular, the prospect that it might try to carry out its economic objectives by manipulating bank supervision. But vice-chairman Donald Kohn told a House Financial Services Committee panel: "I believe US and foreign experience shows monetary policy independence and supervisory and regulatory authority are mutually compatible and even have beneficial synergies."