Bernanke Says Fed Can Watch Over Giants
Friday, October 2, 2009
Federal Reserve Board Chairman Ben Bernanke told a congressional panel Thursday that his agency is "well suited" to oversee the nation's largest financial firms but also addressed reservations about granting the Fed broad new powers, saying he welcomes a proposed council of regulators to monitor risks threatening the entire financial system.
"Our involvement in supervision is critical for ensuring that we have the necessary expertise, information and authorities to carry out our essential functions as a central bank of promoting financial stability and making effective monetary policy," Bernanke told the House Financial Services Committee, in making the case that the agency is particularly qualified to oversee the country's most complex institutions.
But in endorsing a role for the regulatory council in monitoring wider threats, he lent support to an idea advocated by many lawmakers, who have expressed deep reluctance about the Obama administration's proposal in June to give that job to the Fed.
In recent months, the administration has softened its insistence that the Fed alone play this role. The discussions in Congress now center on the balance of power between the Fed and a new council.
"We should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole," Bernanke said during his testimony.
Bernanke said that such a council, composed of representatives from agencies that currently monitor varying sectors of the financial system, could help identify regulatory gaps and detect excessive risks that are being taken by financial firms or that are emerging in the markets.
The Fed chairman urged lawmakers, who have been hashing out legislation to revamp the financial regulatory system, to "support a reorientation of individual agency mandates to include not only the responsibility to oversee the individual firms or markets within each agency's scope of authority, but also the responsibility to try to identify and respond to the risks those entities may pose, either individually or through their interactions with other firms or markets, to the financial system more broadly."
In addition, the central bank chairman spoke Thursday about the importance of reducing incentives for firms that are perceived as "too big to fail," saying that implicit government backing for those companies could lead to unrestrained risk-taking and create a "tilted" playing field that puts smaller firms at a disadvantage. He added that such firms "should be subject to extraordinary oversight, including higher capital and liquidity requirements, tough risk-management rules, and basically stronger supervision."
Bernanke avoided taking a firm position on the administration's proposal to create a new federal consumer agency overseeing credit cards, mortgages and other financial products and to strip the Fed of its current role in this area. Rather, he talked more generally, saying, "As the Congress considers financial reform, it is vitally important that consumers be protected from unfair and deceptive practices in their financial dealings."
Rep. Barney Frank (D-Mass.), who chairs the committee, said the Fed's record of consumer protection before Bernanke became chairman in 2006 was "dismal."