Bernanke and Volcker say Federal Reserve must retain regulatory powers

By Neil Irwin
Washington Post Staff Writer
Friday, January 15, 2010

Two Federal Reserve chairmen -- one current, one former -- made a public case Thursday that the Fed must remain in charge of regulating the nation's biggest financial companies, pushing back against a growing movement in the Senate to strip the central bank of those powers.

Fed Chairman Ben S. Bernanke released a letter and an 11-page document he sent to the Senate Banking Committee arguing that the Fed has unique abilities to oversee complex financial institutions, that those powers are intertwined with its broader responsibility for financial stability, and that it has learned from its mistakes in the run-up to the financial crisis. Separately, former Fed chairman Paul Volcker gave a speech in which he said he was "particularly disturbed" by proposals to move bank supervision elsewhere in the government.

The Bernanke document foreshadows the arguments he will make as the legislative debate heats up over how to restructure financial regulation.

In recent weeks, the Senate Banking Committee has leaned more explicitly toward creating a new federal banking regulator as part of sweeping reforms of the financial regulatory system, leaving the Fed with responsibility only for managing the nation's monetary policy.

Committee Chairman Christopher J. Dodd (D-Conn.) has proposed such a policy explicitly, and there is bipartisan support. The Obama administration has argued that the Fed should remain the chief regulator of the nation's banks and even have broader powers to address risks emerging in the financial system; the House has passed legislation that more closely resembles the administration's approach.

Many of the firms that did the most damage to the financial system in the last crisis were not supervised by the Fed, Bernanke's white paper notes, such as American International Group, Bear Stearns, Countrywide and Lehman Brothers.

Moreover, the document says, the bank supervision role "generates information and expertise that significantly improve the Federal Reserve's ability to effectively carry out its central-bank responsibilities," such as managing crises, providing liquidity to banks and guiding the nation's monetary policy.

Bernanke has repeatedly argued for the centrality of the Fed's regulatory role to its mission, and Thursday's letter suggests he is prepared to defend that turf aggressively to Congress.

He appears to have backing from Volcker, who made similar arguments in his speech to the Economic Club of New York.

Volcker, who was Fed chairman from 1979 to 1987 and is now chairman of Obama's Economic Recovery Advisory Board, said that by long tradition, the nation turns to the Fed to solve crises, and thus that the central bank needs to retain the powers that allow it to respond.

"As my predecessors and successors have been well aware, when a crisis breaks, it is their telephone that rings," he said. "This is not a matter of narrowly defined responsibilities closely defined by law. Rather, it reflects a certain confidence in the central bank as both independent and professionally qualified."

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