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More than a year and a half after Congress enacted the Dodd-Frank Act, regulators finalized a critical rule Tuesday detailing how they will identify nonbank financial firms that pose a threat to the system.
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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.
March 29
WASHINGTON — Federal Reserve Board Chairman Ben Bernanke said Monday that tools to predict the next crisis are still far behind when compared to the central bank's ability to impact economic policy.
"We have spent decades building and refining the infrastructure for conducting monetary policy," Bernanke said in prepared remarks at a conference hosted by the Federal Reserve Bank of Atlanta. "And although we have done much in a short time to improve our understanding of systemic risk and to incorporate a macroprudential perspective into supervision, our framework for conducting financial stability policy is not yet at the same level."
Prior to the recent crisis, financial stability was often "overshadowed" by monetary policy, which has been widely considered the core purpose of central banks, he said.
Bernanke said regulators must continue to pursue the development of a set of indicators and tools to help preserve financial stability and the U.S. economy — an effort already underway by the Fed.
"An inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas, increasing the need for careful monitoring and supervision of the whole system," said Bernanke.
Bernanke noted that the Fed has created the Office of Financial Stability Policy and Research and is working closely with an interagency group to identify systemic risk.
"We are developing a framework and infrastructure for monitoring systemic risk," said Bernanke. "Our goal is to have the capacity to follow developments in all segments of the financial system, including parts of the financial sector for which data are scarce or that have developed more recently and are thus less well understood."
In some cases, like the shadow banking system, where data is difficult to obtain, regulators will have to be "more creative" in how they monitor risk, he said.
The chairman said regulators already look at broad measures like risk premiums, asset valuations and market functioning to determine risk. They also try to gauge the risk of runs by looking at leverage and tracking short-term wholesale funding markets.
When it comes to hedge funds and private equity firms, the Fed is also working with other agencies to create a set of regulatory data, he said.
Bernanke highlighted a few areas like the supervision of nonbank financial companies and ongoing stress tests to showcase progress made by regulators.
The Fed released the results of the third round of stress tests in March, which had the 19 largest institutions undergo a series of exercises to measure their strength under tough economic conditions. A majority of banks passed the test, but others like Citigroup Inc. (C) fell short, prompting an outcry from institutions to understand the Fed's modeling better.
Bernanke acknowledged there might be room for improvements.
"We are evaluating the recent exercise particularly closely to identify both the elements that worked well and the areas in which execution and communication can be improved," said Bernanke.
He also said more work remains on how regulators will identify nonbank companies as systemically important, including in the criteria used by regulators and what requirements firms will have to meet. The Financial Stability Oversight Council completed its final rule on that issue last week.
"As FSOC gains experience with this process, it will make adjustments to its rule and its procedures as appropriate," said Bernanke.
