By Howard Schneider
WASHINGTON (Reuters) - New York Federal Reserve Bank President William Dudley came under fire on Friday from Democratic senators who blasted the bank for lax oversight of major financial institutions.
"Is there a cultural problem at the New York Fed? I think the evidence suggests that there is," said Massachusetts Democrat Elizabeth Warren, a frequent critic of the big banks who is seen as a possible 2016 presidential candidate.
"Change has to come from the top," she added. "Either you need to fix it Mr. Dudley or we have to get someone who will."
The heated questioning at a Senate hearing suggested potential support for a proposal to make the New York Fed chief's job a presidential appointee - one of a number of ideas for reforming the Fed that may be debated in the coming months.
The New York Fed is the most powerful of the U.S. central bank's 12 regional branches. It acts as the Fed's eyes and ears on Wall Street and regulates many of the largest banks. In addition, its president has a permanent vote on monetary policy, while other Fed bank chiefs rotate in and out of voting spots.
No Republicans attended the hearing before the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, but Democrats on the panel pushed Dudley hard on what they argued were lapses in oversight of several large institutions, including JPMorgan and Dudley's former employer, Goldman Sachs.
"Troubling reports suggest that it is back to business as usual at the Federal Reserve Bank of New York," Ohio Democrat Sherrod Brown said as he kicked off the hearing.
Dudley, a former Goldman Sachs partner, said he agreed "regulatory capture" - the idea that a regulator could become too close to a bank, clouding their judgment - was a constant concern, but he argued the Fed had improved its oversight markedly since the 2007-2009 financial crisis.
He said, however, that he was open to stricter rules against Fed regulators taking jobs in the banking industry, particularly with institutions they supervised. Current "revolving door" laws prevent such job shifts only in some cases and only for a year.
"A legitimate question is whether you should make the standards tighter," perhaps by applying it to more supervisors and for a longer period of time, Dudley said.
But he otherwise staunchly defended the New York Fed in a calm but insistent manner through nearly 1-1/2 hours of testimony.
The questioning delved into cases raised in recordings made secretly by former New York Fed examiner Carmen Segarra and aired in recent news reports. Dudley argued that all of those cases were properly vetted.
The portions of the tapes aired in public, which portray Segarra as squelched in her criticism of Goldman Sachs, were not necessarily reflective of how she was treated at the New York Fed, he said.
Dudley said the central bank had "made significant changes to the substance and process of supervision," including establishment of a centralized committee to oversee the supervision of the 15 largest U.S. financial institutions, which account for more than $50 billion in assets.
The Fed's Board of Governors on Thursday announced a review of its oversight of large banks, an apparent attempt to preempt some of the congressional criticism. The study will include a specific look on whether contrary views are encouraged.
(Reporting by Howard Schneider; Editing by Paul Simao)