In the wake of the financial crisis, regulators are strengthening their ability to spot fault lines in the financial system, rather than focusing exclusively on specific companies, Federal Reserve Chairman Ben Bernanke said on Thursday.
The financial crisis demonstrated clearly that supervisory and regulatory practices must consider overall financial stability as well as the safety and soundness of individual firms, Bernanke said in comments prepared for delivery to a conference.
The Fed chairman did not comment on the outlook for the economy or monetary policy in his prepared remarks.
Bernanke said the Fed has set up an internal working group to oversee the largest financial firms that will build on successful approaches used during recent bank stress tests.
During those examinations Fed economists, bank supervisors and other experts worked together to review industry practices and links between firms to detect any possible risks to the broader financial system.
Regulators, including the Fed, came under harsh criticism for failing to spot risky lending and securities packaging practices viewed as contributing substantially to a devastating financial meltdown that led to a deep recession in 2007-2009.
Congress passed the sweeping Dodd-Frank regulatory overhaul last year aimed at preventing the kinds of actions and lapses that led to the crisis.
Under the Dodd-Frank law, bank holding companies with more than $50 billion in assets are considered important to the smooth functioning of the financial system and can be subject to more scrutiny by the Fed.
Bernanke said that whatever new requirements these banks will have to meet will be gradated based on size.
They will be graded on a scale so to speak, Bernanke said. The largest banks will face higher capital and other requirements than those banks that are close to that $50 billion line.
The Fed points to the bank stress tests it conducted in early 2009 as an example of new regulatory vigor. Those exams, which forced some banks to recapitalize while demonstrating that others were well-buffered against any future shocks, are seen as a turning point in the healing of the financial system.
The Fed has not yet decided how much bank-specific information it will release from new yearly bank stress tests mandated by the Dodd-Frank Act, Bernanke said.
We haven't yet come to an internal view on how much information to disclose, he said in response to questions.
The Fed must balance the legitimate business interests and privacy concerns of banks against the legal mandate to give the public a better view into bank safety and soundness.
The Fed will probably not release as many details from yearly bank stress tests as it did in 2009, he said.
(Reporting by Ann Saphir and David C. Clarke in Washington; Writing by Mark Felsenthal; Editing by Andrea Ricci)