Fed's bully pulpit has significant muscle

Washington

THE Federal Reserve has plenty of power to follow through on regulatory threats made to top bank executives aimed at curbing misbehaviour on Wall Street, even if it can't order firms to break up.

"The Fed has a powerful bully pulpit that should not be underestimated," Mike Mayo, an analyst at CLSA Ltd. in New York, said. "It has the authority to approve or disapprove the ability of banks to return capital to shareholders."

Mr Mayo and Karen Shaw Petrou, managing partner of Washington- based research firm Federal Financial Analytics Inc, said the Fed also has wide discretion for action under its authority to ensure "safety and soundness" in the financial system.

New York Fed president William Dudley and Fed governor Daniel Tarullo reproached top Wall Street bankers this week for failing to eradicate a culture that encourages misdeeds that have resulted in more than US$100 billion in fines since 2008. Mr Dudley warned that big banks would be "dramatically downsized and simplified" if bad behaviour persisted, and he proposed changing the way executives are compensated to discourage…