WASHINGTON (MNI) – The following is the testimony to be delivered
Thursday, prepared for the Senate Banking Committee, by Federal Reserve
Chairman Ben Bernanke:

Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting
Financial Stability Before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate

Chairman Johnson, Ranking Member Shelby, and other members of the
Committee, thank you for the opportunity to testify on the Federal
Reserve Board’s role in monitoring systemic risk and promoting financial
stability, both as a member of the Financial Stability Oversight Council
(FSOC) and under our own authority.

Financial Stability Oversight Council

The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) created the FSOC to identify and mitigate threats to
the financial stability of the United States. During its existence thus
far, the FSOC has promoted interagency collaboration and established the
organizational structure and processes necessary to execute its duties.1
The FSOC and its member agencies also have completed studies on limits
on proprietary trading and investments in hedge funds and private equity
funds by banking firms (the Volcker rule), on financial sector
concentration limits, on the economic effects of risk retention, and on
the economic consequences of systemic risk regulation. The FSOC is
currently seeking public comments on proposed rules that would establish
a framework for identifying nonbank financial firms and financial market
utilities that could pose a threat to financial stability and that
therefore should be designated for more stringent oversight.
Importantly, the FSOC has begun systematically monitoring risks to
financial stability and is preparing its inaugural annual report.

Additional Financial Stability-Related Reforms at the Federal Reserve

In addition to its role on the FSOC, the Federal Reserve has other
significant financial stability responsibilities under the Dodd-Frank
Act, including supervisory jurisdiction over thrift holding companies
and nonbank financial firms that are designated as systemically
important by the council. The act also requires the Federal Reserve (and
other financial regulatory agencies) to take a macroprudential approach
to supervision and regulation; that is, in supervising financial
institutions and critical infrastructures, we are expected to consider
the risks to overall financial stability in addition to the safety and
soundness of individual firms.

A major thrust of the Dodd-Frank Act is addressing the
too-big-to-fail problem and mitigating the threat to financial stability
posed by systemically important financial firms. As required by the act,
the Federal Reserve is developing more-stringent prudential standards
for large banking organizations and nonbank financial firms designated
by the FSOC. These standards will include enhanced risk-based capital
and leverage requirements, liquidity requirements, and
single-counterparty credit limits. The standards will also require
systemically important financial firms to adopt so-called living wills
that will spell out how they can be resolved in an orderly manner during
times of financial distress. The act also directs the Federal Reserve to
conduct annual stress tests of large banking firms and designated
nonbank financial firms and to publish a summary of the results. To meet
the January 2012 implementation deadline for these enhanced standards,
we anticipate putting out a package of proposed rules for comment this
summer. Our goal is to produce a well-integrated set of rules that
meaningfully reduces the probability of failure of our largest, most
complex financial firms, and that minimizes the losses to the financial
system and the economy if such a firm should fail.

The Federal Reserve is working with other U.S. regulatory agencies
to implement Dodd-Frank reforms in additional areas, including the
development of risk retention requirements for securitization sponsors,
margin requirements for noncleared over-the-counter derivatives,
incentive compensation rules, and risk-management standards for central
counterparties and other financial market utilities.

The Federal Reserve has made significant organizational changes to
better carry out its responsibilities. Even before the enactment of the
Dodd-Frank Act, we were strengthening our supervision of the largest,
most complex financial firms. We created a centralized multidisciplinary
body called the Large Institution Supervision Coordinating Committee to
oversee the supervision of these firms. This committee uses horizontal,
or cross-firm, evaluations to monitor interconnectedness and common
practices among firms that could lead to greater systemic risk. It also
uses additional and improved quantitative methods for evaluating the
performance of firms and the risks they might pose. And it more
efficiently employs the broad range of skills of the Federal Reserve
staff to supplement supervision. We have established a similar body to
help us effectively carry out our responsibilities regarding the
oversight of systemically important financial market utilities.

More recently, we have also created an Office of Financial
Stability Policy and Research at the Federal Reserve Board. This office
coordinates our efforts to identify and analyze potential risks to the
broader financial system and the economy. It also helps evaluate
policies to promote financial stability and serves as the Board’s
liaison to the FSOC.

International Regulatory Coordination

As a complement to those efforts under Dodd-Frank, the Federal
Reserve has been working for some time with other regulatory agencies
and central banks around the world to design and implement a stronger
set of prudential requirements for internationally active banking firms.
These efforts resulted in the agreements reached in the fall of 2010 on
the major elements of the new Basel III prudential framework for
globally active banks. The requirements under Basel III that such banks
hold more and better-quality capital and more-robust liquidity buffers
should make the financial system more stable and reduce the likelihood
of future financial crises. We are working with the other U.S. banking
agencies to incorporate the Basel III agreements into U.S. regulations.

More remains to be done at the international level to strengthen
the global financial system. Key tasks ahead for the Basel Committee and
the Financial Stability Board include determining how to further
increase the loss-absorbing capacity of systemically important banking
firms and strengthening resolution regimes to minimize adverse systemic
effects from the failure of large, complex banks. As we work with our
international counterparts, we are striving to keep international
regulatory standards as consistent as possible, to ensure that
multinational firms are adequately supervised, and to maintain a level
international playing field.

Thank you. I would be pleased to take your questions.

1. The FSOC’s internal structure consists of a Deputies
Committee–composed of personnel from all of the voting and nonvoting
members–and six other standing committees, each with its own specific
duties. The Deputies Committee, under the direction of the FSOC members,
coordinates the work of the six committees and aims to ensure that the
FSOC fulfills its mission in an effective and timely manner. Return to
text

** Market News International Washington Bureau: 202-371-2121 **

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