Report: Modernization of central bank intertwined with regulations, security

Regulations need to be scrutinized and security concerns in blockchain technology should be addressed by the Federal Reserve, the Government Accountability Office says in a report.

The independent nonpartisan agency in the legislative branch said the Fed needed to address key areas of concern in order to modernize the central bank. Orice Williams Brown, interim comptroller general of the United States, said the bank is yet to implement changes the office recommended in January.

“Fully implementing these five priority open recommendations would directly support the Federal Reserve’s mission,” Brown said.

The central bank of the United States is comprised of the Federal Open Market Committee, which sets interest rates; the Federal Reserve Board, the regulatory body made up of Fed governors in Washington; and the Federal Reserve System, which includes the Fed in Washington and 12 regional Fed banks.

The accountability office called on the Fed to implement stronger supervision powers over banks. Cited in examples for why are the 2023 failures of the Silicon Valley Bank, Signature Bank and First Republic Bank between March 10 and May 1 in the second, third and fourth largest bank failures in history, respectively.

The Federal Reserve is asked to finalize a rule under section 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule would provide the Federal Reserve with more control to assist banks in the event of a failure.

“By implementing the act's requirements, the Federal Reserve could align its supervisory tools with congressional intent that it take early action before an institution's financial condition deteriorates,” the Government Accountability Office wrote.

The accountability office also called on the Federal Reserve to update its regulatory analysis policies. It said the Fed has not updated its policies since 1994.

Brown warned that current policies may not be financially viable. He called on the Fed to develop rigorous transparency standards and conduct reviews of its regulatory system.

“We recommended that the Federal Reserve adopt policies and procedures for systematically performing retrospective reviews of its rules, which could help it evaluate whether rules are achieving their intended effects and avoiding unintended economic consequences,” Brown wrote.

The Government Accountability Office’s renewed recommendations come as President Donald Trump’s new pick to lead the Federal Reserve, Kevin Warsh, has promised to implement lasting change at the central bank. Warsh said in June that he would be implementing five task forces to analyze economic data and better communicate with the public.

"Each task force will serve an objective shared by everyone in the system, shared by everyone around that table that I sat with over the last couple of days: A Federal Reserve that is clear-eyed about its mission, fit for purpose, and focused on the future," Warsh said in a June press conference.

Warsh has also outlined a plan to change how the Federal Reserve sets its interest rates. He said he would shift away from analysis that focused on median outcomes, rather making changes based on small shifts in data.

“What’s the change of that 500,000,001 price because that’s inflation,” Warsh said. “I want to know what inflation is and I think there’s still some work to do."

The Government Accountability Office also called on the Federal Reserve to address issues over blockchain technology risks. Brown said the accountability agency found most federal regulators did not have a framework in which to deal with blockchain technology.

Brown said a “formal coordination mechanism” would help financial regulators to develop a system across the emerging technology.

“Our recommendation to help address blockchain technology risks would help ensure that regulators take a collective approach to blockchain regulation,” Brown wrote.