Federal Reserve Chief Ben Bernanke, seeking policy solutions to manage financial risks as the nation exits a severe economic crisis, on Friday stressed the critical need for Congress take action to tighten finance laws and give greater powers to the government's financial supervisors.
Though the Federal Reserve and other supervisors in the United States and abroad are strengthening the existing regulatory and supervisory framework, it remains critical for the Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks, Bernanke said in prepared remarks at a financial conference held by the Federal Reserve Bank of Boston in Chatham, Massachusetts.
Bernanke's proposals included requiring that all companies important the functioning of the financial system, beyond just banks, be supervised; creating a way to take apart failing non-bank companies in a way that wouldn't damage the system; and establishing a council of top federal agency supervisors to monitor financial risks to the system.
On the same day, and also in attendance, the Fed's Vice Chairman Donald Kohn, noted his wish for well-done, long-lasting reforms.
I hope we build a regulatory structure that's good for a couple of decades and it's worth taking our time to get it right, Kohn said, according to the Wall Street Journal.
A summary of key points in his proposals is listed below:
Strengthening consolidated supervision - The recent financial crisis clearly demonstrated that risks to the financial system can arise not only from banks, but also from other financial firms--such as investment banks or insurance companies--that traditionally have not been subject to the type of regulation and consolidated supervision applied to bank holding companies. To close this gap, the Congress should ensure that all systemically important financial institutions are subject to a robust regime for consolidated prudential supervision.
Creating a framework that allows for the safe unwinding of failing, systemically critical firms - To further ameliorate the too-big-to-fail problem, the Congress should create a new set of authorities to facilitate the orderly resolution of failing, systemically important financial firms ... A new resolution regime for nonbanks, analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks, would permit the government to wind down a failing systemically important firm in a way that reduces the risks to financial stability and the economy.
Setting up a mechanism (such as a systemic oversight council) to identify and monitor risks to financial stability - The Federal Reserve supports the creation of a systemic oversight council, made up of the principal financial regulators. By combining the expertise and information of all the relevant agencies and departments, the council would be in the best position to identify developments that threaten the stability of the system as a whole ... By combining the expertise and information of all the relevant agencies and departments, the council would be in the best position to identify developments that threaten the stability of the system as a whole.
His complete comments today on legislative action in addition to steps the Fed is taking on regulation and supervision, can be seen at the Federal Reserve's website at the following web address: