Fed Res Chair Bernanke Testifies 10/1/09 to House Cmte on Financial Services

Yesterday Federal Reserve Chairman Bernanke presented testimony to the House Cmte on Financial Services regarding regulatory reform of the banking industry in response to the recent crisis. He stated that he feels that any legislation should include five key aspects.

1. Needs to ensure that "systematically important financial institutions are subject to effective consolidated supervision, whether they own a bank or not."

2. There should be an oversight council "made-up of the agencies involved in financial supervision and regulation with a mandate to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies' response to potential systemic risks."

3. A new resolution process needs to be implemented which would allow the government to "wind down a failing systemically important financial institution whose disorderly collapse would pose substantial risks to the financial system and the broader economy...this regime should allow the government to impose losses on shareholders and creditors of the firm."

4. All "systemically important payment, clearing, and settlement arrangements should be subject to consistent and robust oversight and prudential standards."

5. Policymakers "should ensure that consumers are protected form unfair and deceptive practices in their financial dealings."

He states that when you apply all these changes together the systemic risks will not build-up and the system will be more resilient. He then goes on to describe in further detail what he means by each of these changes. The main theme is more regulation, better coordinated regulation, special powers for the government to intervene in what are deemed important financial institutions be they banks or not to prevent shock to the whole economic system, and the need for more than just oversight under the Federal Reserve.