Bernanke: Fed’s Role Over ‘All Banks’ Helps Monetary Policy

Fed Chairman Ben BernankeFederal Reserve Chairman Ben Bernanke said today in prepared testimony for a congressional hearing that the Central Bank’s ability to supervise banks of all sizes “significantly” improves its effectiveness in making monetary policy and fostering financial stability.
Bernanke’s testimony was prepared for a hearing before the House Financial Services Committee on the Fed’s role as chief regulator over financial institutions.
But Bernanke used the opportunity to defend the Central Bank’s broad authority following this week’s unveiling of a financial oversight reform bill by Senate Banking Committee Chairman Christopher Dodd.
One provision of the sweeping reform calls for shifting the Fed’s authority over regional and community banks to the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency (OCC).
The Fed would regulate bank and thrift holding companies with assets of more than $50 billion and would be “responsible for finding risk throughout the system,” under the reform bill.
“The Federal Reserve’s participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window, and fostering financial stability,” Bernanke said.
Over decades, the Fed’s role has evolved into top regulator of all banks, but its primary function is to orchestrate the nation’s monetary policy, with the power to influence consumer price stability and short-term interest rates.
In his testimony, Bernanke stressed the Fed’s ability to capture the banking system “as a whole.”
Ensuring safety and soundness of all banks requires expertise in examinations of risk-management practices, the Fed chairman said.
“The Federal Reserve has developed such expertise in its long experience supervising banks of all sizes, including community banks and regional banks,” Bernanke said.
Bernanke has spent months defending the role of the Fed in speeches and in testimony, particularly since Dodd’s original oversight overhaul proposal late last year. It would have stripped the Fed almost entirely of its bank regulatory authority so that it could focus on monetary policy.
The Central Bank fared much better in Dodd’s final financial reform bill, which calls for a new Financial Stability Oversight Council to monitor system risk and make recommendations to the Fed.
The Central Bank would be able to toughen rules for “capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system,” according to Dodd’s summary of the reform bill’s provisions.

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