Bernanke, in Nod to Critics, Suggests Board of Regulators

Bernanke, in Nod to Critics, Suggests Board of Regulators
By EDMUND L. ANDREWS
Copyright by The New York Times
Published: October 1, 2009
http://www.nytimes.com/2009/10/02/business/economy/02regulate.html?hpw


WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, told skeptical lawmakers on Thursday that the Fed should be put in charge of regulating the nation’s biggest financial institutions.

But in a nod to critics who have expressed alarm about the Fed’s immense power during the financial crisis, Mr. Bernanke said responsibility for monitoring broader risks in the financial system should go to a council of regulators.

“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,” he said in testimony before the House Financial Services Committee.

A council of regulators, Mr. Bernanke said, including the agencies that now exert narrow authority over various types of financial companies, would be able to monitor risks that ripple across the financial sector as pension and hedge funds, investment banks, commercial lenders, mortgage lenders and others do business with one another and invent products and services that are especially difficult to monitor.

Mr. Bernanke asked Congress, which is working on legislation to overhaul 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.”

He said the Fed’s existing powers and experience made it well suited to act as the “consolidated supervisor” for the largest and most complex institutions — the ones whose health is important to the whole financial system.

Working with other regulators, he said, the Fed is developing new capital standards and other regulations for these institutions, including requiring them to hold more capital than current regulations demand, or to maintain more capital in the form of common equity or its equivalent in order to better absorb the shock of unexpected losses.

Mr. Bernanke went so far as to argue that the government should penalize companies, through higher capital requirements, for becoming “too big to fail.”

He said the stiffer capital requirements would “reduce the incentives for financial firms to become very large in order to be perceived as too big to fail.”

But both Democratic and Republicans lawmakers made it clear they wanted to reduce some of the Fed’s power.

“I am not alone in my concern about the Fed as a systemic regulator,” said Representative E. Scott Garrett, Republican of New Jersey. Republicans have proposed restricting the central bank’s power to setting monetary policy.

Democrats would strip the Fed of its authority over consumer protection issues on mortgages, credit cards and other loans. They would put those into a new consumer financial protection agency — a move the banking industry is fighting.

They would also limit the Fed’s sweeping power to bail out firms and take other emergency actions under “unusual and exigent circumstances.”

Mr. Bernanke stayed out of the battle over a consumer protection agency, though he did say the Fed now believed there were some financial products that ought to be prohibited.