Fed may get new powers to supervise investment strategies of banks and funds

BANKS, HEDGE funds and other financial institutions could find their investment strategies curtailed by the Federal Reserve to reduce the risk to the economy from asset bubbles, the US Treasury said yesterday.

David Nason, the assistant secretary for financial institutions, said the US central bank should use its proposed new powers as a stability regulator to "lean against the wind" by forcing institutions to change their investment strategy if it judged they threatened the wider economy.

His comments came as Deutsche Bank reported its first quarterly loss in five years yesterday and UK bank HBOS asked shareholders for £4 billion (€5 billion) to shore up its balance sheet.

Deutsche reported a net loss of €141m for the first three months of 2008 as a result of what Josef Ackermann, chief executive, described as the most difficult markets "in recent memory".

He added that the short-term outlook remained highly uncertain.

Net revenues more than halved from €9.6 billion in the first quarter of 2007 to €4.6 billion as some business lines shrank.

Writedowns of €2.7 billion were €200 million more than the bank had previously warned.

The powers outlines by the Fed yesterday are contained in a Treasury blueprint published last month, which would need congressional approval and may not even reach the statute book.

But regulators see them as offering a template for future regulation of the financial system.

A key feature of this plan is to give the Fed roving authority to collect, analyse and publish market data from a wide range of financial institutions, from banks to hedge funds.

Mr Nason said the Fed would have broad "macro-prudential" authority that it could use to try to "prevent broad economic dislocations caused by potential excesses".

As the "market stability regulator" the Fed would also be able to force financial institutions of all kinds to change their strategies if their actions created risks to financial stability, Mr Nason said. - (Financial Times service)