Chairman Bernanke Speaks Before The House On Regulatory Reform
Federal Reserve Chairman Ben Bernanke gave testimony before the House’s Committee on Financial Services on Thursday, discussing his views on financial regulatory reform. He believes a consolidated approach is needed and that a number of elements are necessary to safeguard the economy from systemic risk.
The current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other financial firms–such as investment banks or insurance companies–that traditionally have not been subject to the type of regulation and consolidated supervision applicable to bank holding companies.
To close this important gap in our regulatory structure, legislative action is needed that would subject all systemically important financial institutions to the same framework for consolidated prudential supervision that currently applies to bank holding companies. Such action would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight.
For some time it was thought that the Fed would gain more control after the regulatory shakeup but Congress has been reluctant to give more power to the Fed and Bernanke agreed that a supervisory oversight council may be more appropriate. The Fed hasn’t been immune to it’s own share of criticism, despite the praise it has received for bringing the financial system back from the brink of collapse.
Of course more regulation will also be needed for the derivatives market, which allowed many financial institutions to raise their leverage levels without sufficient capital reserves to back them up. Many critics are advocating breaking up systemically risky firms but that doesn’t appear to be the path that Congress will take.
Also discussed was that while the FDIC is charged with the orderly breakup of failing commercial banks, there is no real authority in charge of the breakup for the insurance or investment sector, although with the last two major investment banks converting to bank holding companies the latter may be a moot point. It was pretty much the bankruptcy of Lehman Brothers and it’s disorderly breakup, after the government declined to offer them a bailout that lead to last year’s financial panic.
