Washington banished the New York Fed from the big boy regulators club

In a previously unreported shakeup, the Federal Reserve has quietly taken control of Wall Street bank regulation - right out of the hands of the New York Fed, The Wall Street Journal's Jon Hilsenrath reported.

"This reserve bank doesn't breathe any more without asking Washington if it can inhale or exhale," Hilsenrath quoted one person in the banking community as saying.

Initiated back in 2010 and rooted in the Dodd-Frank bank regulation act, the idea of the power shift was to cut down on the number of regulators working on-site at banks, and take a step back - like, all the way to Washington - to gain more perspective, according to Daniel Tarullo, the Fed governor who runs the committee now in charge of bank supervision.

But it's caused a serious stir with the New York Fed, which has traditionally been responsible for many aspects of Wall Street oversight.

In the years leading up to the financial crisis, the Federal Reserve, not the New York Fed, was actually responsible for overseeing the firms that caused the most trouble, including Bear Stearns, Fannie Mae, Freddie Mac, AIG, and Lehman.

And yet, Washington has stopped inviting the New York Fed to the high-level regulatory policy meetings it used to attend, Hilsenrath reported.

Another awkward moment arose last year when the Fed failed Citigroup for its stress test, an annual assessment designed to gauge how prepared banks are for market upsets. Meanwhile, the New York Fed had reportedly told Citi not to worry and that it would have more time to get things together.

On that front, there won't be any confusion this year: stress test results come out later on Thursday, and Citi CEO Michael Corbat is accutely aware of how high the stakes are - he's widely expected to step down if the bank fails again.

Read the full story in The Wall Street Journal >>