Bernanke: Fed's Authority is Best Suited for Oversight

Fed Chairman Ben BernankeIn an 11-page defense of its authority, Federal Reserve Chairman Ben Bernanke today relayed to key Senators his reasoning for keeping the Fed’s current regulatory power intact, particularly because of “its understanding of the emerging strains on financial firms.”
Moreover, Bernanke said the Fed has gained a firmer grip on the “possible implications” of those strains on the financial markets and the broader economy.  
During the current crisis, the Fed’s supervisory role has given it timely access to information about the banking sector, payments systems and capital markets, he said.
“This information has been critical to the Federal Reserve’s efforts to identify the difficulties facing depository institutions of all sizes and to take steps to address those problems,” the Fed chairman wrote in a report provided to the top lawmakers on the Senate Banking Committee, Chairman Christopher Dodd and the panel’s top Republican, Richard Shelby.
The Senate is considering a substantial overhaul of the U.S. financial oversight system to avoid another economic meltdown. Dodd’s panel is considering stripping the Fed of some of its powers, diminishing its authority to a narrow role of setting monetary policy.
The Fed’s current role is far-reaching as a primary supervisor of banks of all sizes and U.S. bank holding companies. It also sets final rules for credit card issuers, as well as intervening in the steering of financial institutions deemed “too big to fail” in the overall economic scheme – as it has during the financial crisis.
The House has already approved an oversight overhaul bill that redefines and diminishes the role of the Fed. Lawmakers contend that the crisis was propelled by lax or inefficient regulatory supervision of the financial markets, including major banks, investment houses and the mortgage and derivatives industries.
Bernanke pointed out that the Fed has a four-year head start on bolstering oversight of the derivatives markets, which was at the center of the huge financial losses of former Wall Street giants. And without the knowledge that the Fed gained, the financial crisis could have been worse, he said.
“Since 2005, the Federal Reserve has been leading efforts by market participants and domestic and international regulators to strengthen the infrastructure of the credit derivatives and other over-the-counter derivatives markets” Bernanke said. “While further progress is needed, without the progress that was achieved since 2005, the failures of major dealers and defaults by some of the very largest names traded in the credit derivatives markets surely would have been far more disruptive than they were.”
The Fed is in a prime position now to help maneuver financial institutions through the current crisis aftermath as regulators set up a new system to avoid or lessen the impact of the next crisis.
“Beyond traditional bank examination expertise… macro-prudential supervision will require economic sophistication including knowledge of the macroeconomic environment, as well as substantial expertise regarding money markets, capital markets, foreign exchange markets, and other financial markets,” Bernanke said.

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