Financial Update (First Quarter 2007)
Bernanke Focuses on
Achieving economic stability requires information—and lots of it. The Federal Reserve’s dual roles of formulating monetary policy and supervising banks provide the broad-based information it needs to attain that stability, said Fed Chairman Ben Bernanke in a January speech to the American Economic Association in Chicago.
Fed's broad perspective allows objective decision making
In past financial crises, such as the 1987 stock market crash or failures of large financial organizations, the Fed has resolved situations with minimal shock to the overall economy, Bernanke said, because it forged relationships with key people and had the expertise required to make informed decisions. "Financial crises and panics often involve problems of coordination and collective action," he said.
"The Fed's ability to deal with diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it holds by virtue of being both a bank supervisor and a central bank," he added.
Supervisory role benefits nonsupervisory activities
The information the Federal Reserve gains through bank supervision gives the Fed an "exceptionally broad and deep understanding" of financial markets and institutions, which is useful in carrying out its nonsupervisory activities, Bernanke said. He cited the formulation of monetary policy, oversight of the nation's payment system, and management of credit risk as three activities that the Fed carries out more effectively because of its role in bank supervision.
"In short, the Fed's supervisory powers help both to give it a voice in policy discussions concerning financial stability and to increase the quality of its contributions to those discussions," he said.
One model doesn't fit all
Bernanke noted that some other advanced economies—the United Kingdom, Japan, and the euro area, for example—have separated bank supervision from monetary policy making. He said that because different countries have different regulatory objectives and political systems, no single model is the best one for every economy.
But in the United States, where the Fed was created to quell the monetary panics that periodically seized the nation, combining supervision and policy making has given it "a uniquely broad expertise in evaluating and responding to emerging financial strains," he said.