Wall Street investment banking firms that have been authorized to temporarily borrow from the Federal Reserve at the same discount rates as commercial banks should be subject to Fed oversight, Treasury Secretary Henry Paulson said yesterday.

"The Federal Reserve should have the information about these institutions it deems necessary for making informed lending decisions," Paulson said at the U.S. Chamber of Commerce's Capital Markets Competitiveness Conference here.

The Treasury secretary suggested that the Fed, Securities and Exchange Commission, and Commodity Futures Trading Commission, which are already working together, "should consider whether a more formalized working agreement should be entered into to reflect these events."

The Fed, like other banking regulators, focuses on the safety and soundness of banks, whereas the SEC, which oversees investment banking firms, focuses on investor protection.

Paulson's remarks come as the Bush administration is developing a proposal to overhaul regulation of the nation's financial services sector.

The comments follow the Fed's efforts last week to create a lending facility for the 20 primary dealers of U.S. government debt so that they can borrow money at the same discount rate that banks have been charged for overnight loans. That rate is currently 2.5%. Financial institutions other than banks have not been permitted to directly borrow from the central bank since the 1930s, according to the Treasury.

The Fed took the action after orchestrating plans for JPMorgan Chase & Co.'s purchase of Bear, Stearns Cos. to prevent that firm from filing for bankruptcy, a move that financial experts warned could have triggered a systemic meltdown of the financial markets.

Paulson told those at the conference, "Access to the Federal Reserve's liquidity facilities traditionally has been accompanied by strong prudential oversight of depository institutions, which also has included consolidated supervision where appropriate. Certainly any regular access to the discount window should involve the same type of regulation and supervision."

At the same time Paulson cautioned, "It would be premature to jump to the conclusion that all broker-dealers or other potentially important financial firms in our system today should have permanent access to the Fed's liquidity facility. Recent market conditions are an exception from the norm. At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil."

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