Financial Update (Third Quarter 2008)

Fed Chair Discusses Regulatory Policy

Fed Chairman Ben Bernanke Fed Chair Ben Bernanke recently discussed financial regulatory and stability issues that have taken prominence following the nation's mortgage lending crisis that has affected individual home buyers, lenders, and the nation's economy since 2007.

"The recent experience, including the broader turmoil we have seen in the financial markets, will have—indeed, is already having—important consequences for U.S. regulatory policy," he said.

Regulatory actions intended to curtail the system's turmoil
Bernanke enumerated some steps that regulators have taken—and others that are under consideration—to calm roiled financial markets. These steps include the home mortgage lending rules the Fed released on July 14, the proposed enhanced regulatory oversight of Fannie Mae and Freddie Mac, and further reform of other parts of the U.S. financial system.

System relies on discipline, oversight
Bernanke noted that, in general, the financial system depends on market discipline to restrain risk by financial firms, backed up by "prudential oversight" when the nation's overall financial stability could be at risk or where government guarantees such as deposit insurance are involved.

In some cases, though, that system is not enough. Bernanke remarked that losses and writedowns taken at financial institutions since last August demonstrate that, in this instance, market discipline and regulation did not limit leverage nor risk taking enough to preserve financial stability.

Related
Speech transcriptoff-site image
"New Mortgage Rule Intended to Protect Consumers" (FU Q3 2008)

"Working collaboratively with regulators both here and abroad as well as with the firms themselves, the Federal Reserve has redoubled its efforts to strengthen the capital positions, liquidity reserves, and risk-management practices of the institutions for which we have supervisory responsibility," Bernanke said.

Progress achievable on important fronts
Financial crises have been part of commerce for centuries, and it is folly to hope that they can be completely eliminated, the chairman said. Still, recent turmoil highlights the need to devise ways to make the financial system more resilient and stable, he said. To that end, Bernanke described several broad areas in which progress might be made: improving the regulation and supervision of financial institutions, strengthening the financial infrastructure, and possibly developing a new resolution process for securities firms.

"In the longer term," he said, "it is up to the Congress to determine whether still broader reforms are needed. Making that determination will raise a host of complex and challenging issues, but the stakes are commensurately high."

 

July 30, 2008