Bernanke Urges Broader Powers For Central Bank
Saturday, August 23, 2008
JACKSON HOLE, Wyo., Aug. 22 -- Federal Reserve Chairman Ben S. Bernanke on Friday laid out his views of how the central bank should position itself to try to prevent or ease future financial crises. But he acknowledged that any such changes are fraught with new risks of their own.
Bernanke wants the Fed to have a more explicit role overseeing the plumbing of the financial system -- the computer systems, contractual arrangements and such by which financial institutions conduct transactions. And he would like for bank regulation to focus more on ensuring that the financial system as a whole is in sound shape, not just on the risks facing any given bank.
"An expectation by financial market participants that financial crises will never occur would create its own form of moral hazard," Bernanke said, "and encourage behavior that would make financial crises more, rather than less, likely."
Bernanke's speech here came at a conference of many of the world's top central bankers and economists on financial stability -- in the same ballroom where one year ago he indicated that the Fed would respond aggressively to a "financial storm that reached gale force some weeks before."
That storm "has not yet subsided," Bernanke said Friday, as he offered his broadest analysis to date of the regulatory failures that contributed to the problems, and said that "many challenges remain."
Since the crisis began in August 2007, the Fed has taken unprecedented steps to try to prevent the financial crisis from spilling over into the broader economy -- with limited success. One year in, Bernanke and his colleagues have begun drawing conclusions about how the financial system should be remade to prevent a repeat of this experience.
Treasury Secretary Henry M. Paulson Jr. has proposed giving the Fed broad authority over the financial system as a whole, but taking away some of its day-to-day role overseeing the soundness of bank holding companies. Congress will take up that possibility next year.
But Bernanke shows no desire to give up the Fed's responsibility for day-to-day supervision of the nation's banks, even as it takes over broad new responsibilities overseeing investment banks and other kinds of financial institutions. That concerns some experts.
"No other industrial country has the central bank also doing prudential supervision," said Charles Calomiris, a Columbia University finance professor, in presenting a paper analyzing the crisis.
The March collapse of investment bank Bear Stearns convinced Bernanke that one key to ensuring financial stability is more-intensive regulation of the nation's financial infrastructure, such as the systems that banks use to pay each other.
"This experience has led me to believe that one of the best ways to protect the financial system against future shocks, including the possible failure of a major counterparty, is by strengthening the financial infrastructure," he said, including both the physical computers used to conduct trades and the various contractual arrangements and processes behind them.
The Fed felt the need to intervene to arrange the sale of Bear Stearns then because failing to do so could have caused a cascading series of failures through complex and obscure markets.