Administration Plans to Weaken Fed’s Power : Regulation: The Treasury wants to assume much of the authority, sources say, even though the Fed is one of the most effective agencies.

WASHINGTON —  On the heels of the largest bank failure in years, the Bush Administration is considering a plan to dilute the Federal Reserve Board’s regulatory power over commercial banks--even though the Fed is widely considered the best regulatory agency of financial institutions in Washington.

A new banking reform package under study by the Treasury Department would reduce the Fed’s power to regulate banks and transfer many of its current powers to a new bank regulatory office at the Treasury Department, according to government and banking industry sources.

Currently, regulation of the nation’s commercial banks is divided among three agencies--the Fed, the Treasury Department’s Comptroller of the Currency and the Federal Deposit Insurance Corp., which also provides banks with deposit insurance.

This weekend’s collapse of the Bank of New England--the third-largest bank failure in American history--also is prompting a greater sense of urgency in Congress to take quick action on the government’s plans to replenish and reform the deposit insurance system, government officials said. Federal regulators were forced to take over the institution and two affiliates while providing a $2.3-billion bailout to protect all of the funds of their depositors.

Meanwhile, top Federal Reserve officials are said to be deeply upset by the proposed concentration of power at the Treasury, but Fed Chairman Alan Greenspan apparently has acquiesced to the change.

The central bank is widely considered to be the most efficient bank regulator and has experienced a lower rate of bank failures among the institutions that it supervises than have any of the federal government’s other major bank regulating agencies.

“I think our examiners have done such a fine job, especially in cases involving troubled banks, that I would hate to throw that away,” said Robert Black, president of the Federal Reserve Bank of Richmond, Va. “On paper it sounds good to simplify things, but our regulatory involvement works well the way it is.”

Several government sources said Monday that bank regulators at the Federal Reserve voiced far greater concern over the past year than did other regulatory officials about the financial condition of the Bank of New England. The bank was directly supervised by the Comptroller of the Currency, but the Fed was responsible for overseeing its holding company. The bank failed last spring to meet certain capital requirements established by the comptroller’s office, but the comptroller failed to take any early steps to head off last weekend’s collapse, sources said Monday.

The Bush Administration’s plan to consolidate regulatory authority, set to be unveiled later this month, is part of a much broader banking reform package now under review at the Treasury Department.

The plan would strip the Fed of most of its current regulatory responsibilities, limiting its supervision to the nation’s 50 largest bank holding companies. Currently, the Fed supervises 1,047 state-chartered banks that are members of the Federal Reserve system, along with all of the nation’s 6,444 bank holding companies.

Although the Fed’s role in direct supervision of commercial banks is smaller than that of the Comptroller of the Currency, its role as the examiner of bank holding companies gives it broad influence over a wide array of activities in the banking industry.

Banking industry and government officials, meanwhile, said Monday that they believe that the Bank of New England collapse will almost certainly accelerate action in Congress to beef up the depleted bank insurance fund by giving the FDIC new powers to collect more money from the banking industry. In fact, officials said, Congress may act to refinance the FDIC before it considers the Bush Administration’s broader banking reform package.

The FDIC, which now must cover the bank’s losses and protect the deposits of its customers, says that since the bank’s problems have been well known for months, it had already calculated the costs into its estimate of how much the fund would lose in 1990. At the end of the year, the FDIC’s bank insurance fund had $9 billion in reserves, down from a peak of $18.3 billion in 1987.

“The Bank of New England doesn’t change anything, because we had already figured that into our 1990 numbers,” said a spokesman for the FDIC.

Still, FDIC officials acknowledged that the insurance fund is likely to lose another $5 billion in 1991 and said that it would end the year with just $4 billion if Congress doesn’t provide a cash infusion.