-
In his third lecture, Federal Reserve Board Chairman Bernanke said regulators cannot tolerate continuance of "too big to fail" institutions and government bailouts when firms take excessive risks.
March 27
WASHINGTON — One impact of the financial crisis was that it brought the central bank back to its original mission of financial stability, Federal Reserve Board Chairman Ben Bernanke said Thursday.
"Based on the crisis and what happened and the effects that we are still feeling, it's now clear maintaining financial stability is just as important [of a] responsibility as monetary and economic stability," Bernanke said in his fourth and final lecture to business students at George Washington University. "And indeed very much a return to where the Fed came from in the beginning."
The Fed, established by Congress in 1913, was intended to reduce the incidence of panics that risked crippling the financial system.
"Financial stability," Bernanke said, "was the original goal of the creation of the Fed. So now we sort of [have] come full circle."
During the lecture, Bernanke outlined the monetary policy response that the central bank took after the crisis to help bolster the U.S. economy by lowering short-term interest rates to near-zero levels and engaging in two rounds of quantitative easing to help lower long-term interest rates.
But he also touched on the reform effort currently under way by regulators, including the Fed, which is still very much in the early stages.
"The crisis revealed many weaknesses in our regulatory system," Bernanke said.
For one, he said, there was no watchdog keeping guard over the entire financial system. Broker-dealers like Bear Sterns and insurance giants like American International Group were left to their own endeavors and failed to receive significant oversight by any regulator.
The Dodd-Frank law sought to close many of those gaps in regulators' oversight, he explained.
He described it as an "iterative process."
Bernanke highlighted the creation of the Financial Stability Oversight Council, which is headed by Treasury Secretary Tim Geithner, to help regulators coordinate and meet regularly to discuss financial and economic developments with the aim of heading off future threats to the financial system.
The law also put greater responsibility on the shoulders of regulators, which has led the Fed to restructure its supervisory division so that it looks "very comprehensively" at financial markets and financial institutions, Bernanke said.
Regulators also now have the power to designate as systemically important certain companies that fell out of supervisors' normal purview. This way those companies will have adequate supervision, by the Fed.
"That's a process that's going on now," Bernanke said. "So there will not be any more large, complex systemically critical firms that have no oversight."
(Regulators have not yet designated any nonbank firm under this new tool.)
Bernanke said he hopes the law ended the moral hazard of regulators' having to intervene to save a "too big to fail" institution through new tools that would allow a company on the brink of failure to be unwound safely without severely disrupting the financial market.
That responsibility now falls to the Federal Deposit Insurance Corp., which has been in charge of overseeing shutdowns of failing companies since the 1930s but would have broader authority to take similar action for larger and more complex companies.
To help prevent such a failure, Bernanke said, large firm now face more stringent supervision and regulations, including a set of higher capital requirements for the most systemically important firms.
Even with so many robust rules, however, tougher regulations won't prevent another financial crisis, the Fed chairman warned.
"A new regulatory framework will be helpful, but again it's not going to solve the problem," he said. "The only solution in the end is for us regulators and our successor to continue to monitor the entire financial system and try to identify problems and to respond to them using the tools that we have."
