Fed Chairman Discusses Regulatory Reform
The United States would be well served to consider adopting a financial regulatory approach focused on risks to the financial system as a whole, Federal Reserve Chairman Ben Bernanke said during a March 10 speech.
"A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets," Bernanke said in remarks to the Council on Foreign Relations in Washington, D.C.Reforms would monitor, address risks
One way to enact such an approach would be for Congress to empower a governmental authority to monitor, assess, and, when appropriate, address potential systemic risks, he noted. Such an authority’s mission might encompass
Instituting a "macroprudential approach" would present challenges, Bernanke pointed out, not least because the supervisory authority’s job itself would be extremely demanding. It would require superior market and institutional knowledge, analytical sophistication, the ability to process vast amounts of diverse information, and supervisory expertise. Additional challenges would include clearly defining the powers a systemic risk authority would need and then meshing that authority with the nation’s existing decentralized regulatory system.
A new authority would rely on existing agencies’ information and programs when possible, Bernanke said. But that information alone would not be sufficient. A systemic risk regulator would, for example, need broad authority to obtain information from banks and important market participants, including those that might not now be subject to regular supervisory reporting requirements.
"Several existing agencies have data and expertise relevant to this task, so there are a variety of organizational options. In any structure, however, to ensure accountability, the scope of authorities and responsibilities must be clearly specified," the Fed chairman said.
The role of the Federal Reserve in such a scenario would depend a great deal on how Congress defines the responsibilities of a new authority, he added. "As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity," Bernanke said, "even if not in the lead role."
March 31, 2009