By Steven K. Beckner
NEW YORK CITY (MNI) – Federal Reserve Chairman Ben Bernanke said
Wednesday evening that Congress has made “significant progress” on
financial regulatory reform and looked forward to final enactment in a
matter of “a few weeks.”
Bernanke, speaking at a conference sponsored by the Squam Lake
Group of academic economists and former policymakers, was generally
supportive of the legislation as it is taking shape, but expressed some
reservations about the Fed being given too much responsibility as a
“systemic risk” regulator.
While the Fed needs to be said “extensively involved” in efforts to
preserve financial stability, he said all financial regulators need to
incorporate “macroprudential” supervision in their regulation of the
financial institutions in their bailiwick.
Bernanke was commenting on a report by the Squam Lake Group, and he
backed its recommendations for strengthening capital and liquidity
requirements, consolidated supervision of financial holding companies,
making shareholders bear the costs of excessive risk-taking and putting
in place a “resolution” mechanism for safely unwinding large financial
firms.
“The Congress has made significant progress in each of the
substantive areas I have discussed today as well as many others,” he
concluded in prepared remarks. “Indeed, it appears that final
legislation that addresses in some way the great majority of the
recommendations in The Squam Lake Report could be enacted in the next
few weeks.”
Where Bernanke seemingly had reservations — both with the Squam
Lake Report and with the House and Senate bills — was with giving the
Fed enormous responsibility for curbing risk to the entire financial
supervision through heightened supervision of the biggest, most
systemically important financial institutions.
“The report recommends that a single systemic regulator be assigned
responsibility for overseeing the health of the overall financial system
and, in particular, that this duty be assigned to the central bank,” he
said. “We agree that the central bank — in the United States, the
Federal Reserve — should be extensively involved in the collective
effort to promote financial stability.”
“The reasons for this involvement include the central bank’s
breadth of expertise and its traditional roles in promoting financial
stability and serving as a backstop liquidity provider to the financial
system,” he said.
“However, giving all macroprudential responsibilities to a single
agency risks creating regulatory blind spots, as — in the United
States, at least — the skills and experience needed to oversee the many
parts of our complex financial system are distributed across a number of
regulatory agencies,” he continued.
“Rather than concentrating all macroprudential authorities in a
single agency, we prefer that all regulators be required to routinely
factor macroprudential considerations into their supervision, thus
helping ensure that risks to financial stability can be addressed
wherever they arise,” he added.
Bernanke backed the creation of a Systemic Risk Council made up of
all the financial supervisors. He said “Such a council would provide a
forum for agencies with differing responsibilities and perspectives to
share information and approaches, and would facilitate identification
and mitigation of emerging threats to financial stability.”
But he said “the council should not be directly involved in
rule-writing and supervision. Rather, those functions should remain with
the relevant supervisors, with the council in a coordinating role.”
Bernanke said that, while the legislative process moves forward,
the Fed has “already taken a number of steps to reorient and strengthen
our supervision of the largest, most complex financial firms that we
oversee and to broaden our field of vision to incorporate
macroprudential concerns. For example, in my view a critical feature of
a successful systemic approach to supervision is a multidisciplinary
perspective.”
He said the Supervisory Capital Assessment Program (SCAP) or
“stress tests” the Fed conducted on major banks last year “showed how
much can be learned by simultaneous evaluations and comparisons of the
practices and portfolios of different firms, rather than focusing on
only one firm at a time, as was the supervisory approach often taken in
the past.”
So he said the Fed is “increasing our use of cross-firm, horizontal
examinations. And we are implementing a quantitative surveillance
mechanism and enhanced data collection to further strengthen our
supervision of systemic firms.”
Bernanke listed two “core principles” that should guide financial
regulators as they seek to strengthen the financial system and “minimize
the risk of a replay of the recent financial crisis.”
First, he said, “financial policymakers and supervisors must
consider more than the safety and soundness of individual financial
institutions, as important as that is; they should also consider
factors, including interactions of institutions and markets, that can
affect the stability of the financial system as a whole.”
Second, he said, “the stakeholders in financial firms — including
shareholders, managers, creditors, and counterparties — must bear the
costs of excessive risk-taking or poor business decisions, not the
public.”
“The perception that some institutions are ‘too big to fail’ — and
its implication that, for those firms, profits are privatized but losses
are socialized — must be ended,” Bernanke said, echoing what
Philadelphia Fed President Charles Plosser had said earlier and what the
report also asserted.
“The Federal Reserve strongly agrees with both of these principles,
and both have been important in shaping our views on regulatory reform,”
he said.
The Squam Lake Report recommends, among other things, the adoption
of a more systemic approach to the supervision and regulation of
financial firms and markets; enhanced capital and liquidity regulation
for financial firms, particularly for systemically important
institutions; improved information collection by regulators and, where
possible, the public release of such information; development of a
resolution regime that would allow the authorities to manage the failure
of a systemically important financial firm in an orderly manner while
imposing losses on shareholders and creditors; and significant
strengthening of the financial infrastructure, particularly for
derivatives contracts.
Bernanke said the Fed “has supported legislative changes in all of
these areas, and, where possible under current law, has initiated
changes along these lines within its own operations…”
The Fed chief noted that “most financial regulatory systems
throughout the world are designed primarily to ensure the soundness of
individual institutions.” But he said that is “not sufficient.”
“The failure of large, complex, and interconnected financial firms
can disrupt the broader financial system and the overall economy, and
such firms should be regulated with that fact in mind,” he said.
“Likewise, the costs of the failure of critical financial
infrastructures, such as payments and settlements systems, are likely to
be much greater and more widely felt than the costs imposed directly on
the owners of and participants in those systems.”
So he said regulatory agencies must “supervise financial
institutions and critical infrastructures with an eye toward overall
financial stability as well as the safety and soundness of each
individual institution and system.”
He said the financial crisis “demonstrated that a too-narrow focus
on the safety and soundness of individual institutions or systems can
result in a failure to detect and thwart emerging threats to financial
stability that cut across many firms or markets.”
Bernanke said “a critical building block of a successful systemic,
or macroprudential, approach to supervision is a requirement that all
systemically important financial firms be subject to consolidated
supervision.” And he said the Fed is already proceeding along those
lines.
-more- (1 of 2)
** Market News International **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$,MK$$$$,M$$CR$]