Financial Regulatory Forum

New US Council, not just Fed, must eye risk

October 1, 2009

Chairman of the Federal Reserve Ben Bernanke speaks at the Congressional Black Caucus Foundation's 39th Annual Legislative Conference at the Washington Convention Center in Washington, September 25, 2009.   REUTERS/Larry Downing (UNITED STATES POLITICS BUSINESS)   By Kevin Drawbaugh
   WASHINGTON, Sept 30 (Reuters) – The head of the Federal Reserve will step back from one of the most controversial parts of the Obama administration’s drive for financial regulation reform, saying sweeping new oversight powers proposed for the U.S. central bank should be shared with other regulators.
   Federal Reserve Chairman Ben Bernanke will tell a Congressional panel on Thursday that a new, broad council of financial regulators, not just the Federal Reserve, should be granted powers to monitor systemic risk in the economy.
   His remarks were included in a text of his testimony to be delivered to the House of Representatives Financial Services Committee which were obtained by Reuters on Wednesday.
   Bernanke’s prepared comments come amid growing skepticism in Congress and beyond about an administration proposal to give the Fed the lead role in policing the economy for systemic risk, albeit in coordination with an inter-agency council.
   The Fed is “well suited” to supervise major financial institutions whose failure could damage the economy, Bernanke said in the text.
   In addition, he said all systemically important financial firms should be subject to a consolidated regulator, whether or not the firms own banks.
   But an inter-agency council should be used to monitor the very broadest sorts of risk, he said, placing new emphasis on an idea embraced by increasingly vocal critics of the Fed.
   While the administration has backed the idea of creating an inter-agency council to work with the Fed, it has been firm on its determination to place the most power in the central bank.
   Some of the Fed’s critics point to the failure of the Fed, along with other regulators, to spot the threat to the financial system posed by overexposure of banks and other firms to the housing market which eventually helped cause the credit crisis and push the world into a recession.
   World Bank President Robert Zoellick on Monday sounded a cautionary note about granting greater regulatory power to the Fed, saying there had been lapses by central banks in monitoring risks in the run-up to the crisis.
   Bernanke, in his prepared remarks, said it was a good idea for one single regulator to be responsible for supervising individual firms.
   “However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets — both regulated and unregulated — may exceed the capacity of any individual supervisor,” he said.
   “Instead, 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.”
   The comments appeared to represent a change of tone by Bernanke. He told a congressional committee on July 24 that taking on formal responsibility for supervising the broad health of the financial system would be a natural outgrowth of the central bank’s existing duties.
   A shift in emphasis by the Fed chairman would not be surprising, said Joe Engelhard, policy analyst at investment research firm Capital Alpha Partners in Washington.
   “There’s been a lot of negative reaction, particularly by Republicans, on the House side. In the Senate, (banking committee) Chairman Christopher Dodd hasn’t been too supportive either” of the administration’s proposal, Engelhard said.
   House Financial Services Committee Chairman Barney Frank has been trying to find a new formulation that would give the council more power, but preserve a central Fed role.
   “It would be smart for the chairman of the Federal Reserve to take that approach, as well,” Engelhard said.
    A key to the final outcome of the debate will be if the Fed gets clear power to intervene when systemic risk is detected.
   “Frank still wants the Fed to have all the authority it needs to address a future AIG or a future Lehman Brothers … They’re perfectly willing to beef up the oversight council because at the end of the day, as long as the Fed’s got the authority, it can do what it has to do,” he said.
   On another front, Bernanke said in his comments prepared for delivery on Thursday that a new “special resolution authority” should be created to allow the government to wind down a failing systemically important financial institution.
   Policymakers should also ensure that consumers are protected from unfair and deceptive practices in their financial dealings, he said in the text. (Writing by Kevin Drawbaugh and William Schomberg; Editing by Gary Hill, Bernard Orr) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax))) Keywords: USA FED/BERNANKE 
  
Thursday, 01 October 2009 07:38:42RTRS [nN01248184] {C}ENDS

Comments
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In my opinion it’s just a move to placate and head off oversight and examination by Congress into the FED. I don’t trust any of them at this point because I don’t really feel all that secure as I don’t think that they view the American public as the people they work for.

 

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