Federal Reserve Chairman Ben S. Bernanke said the government must avoid imposing burdensome rules on financial companies as it carries out the biggest regulatory overhaul in seven decades.
“No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said today in a speech in Chicago. “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”
Bernanke and Fed officials are trying to balance the need to reduce the risk of repeating the 2007-2008 financial crisis with the aim of reviving the U.S. economy after the worst recession since the Great Depression. The central bank, under last year’s Dodd-Frank Act, was given the job of overseeing the biggest financial companies.
“While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macroprudential risks,” Bernanke said to the Chicago Fed’s annual banking conference.
Addressing the same conference today, Federal Deposit Insurance Corp. Chairman Sheila Bair said that the Fed and FDIC must be willing to force systemically important firms to create “credible and actionable” living wills to protect against the kind of tumult that followed the 2008 collapse of Lehman Brothers Holdings Inc.
“The FDIC and the Fed must be willing to insist on organizational changes that better align business lines and legal entities well before a crisis occurs,” Bair said.
Bair expressed concerns that many systemically important financial institutions have thousands of subsidiaries and maintain activities that cross many different organizational structures and regulatory jurisdictions.
“This can make it very difficult to implement an orderly resolution of one part of the company without triggering a costly collapse of the entire company,” she said.
Bernanke, 57, spent most of his speech discussing the approach by the Fed and other regulators to carrying out the Dodd-Frank Act. He has backed a so-called macroprudential approach to supervision that looks at patterns and risks across different companies and markets and not just at how individual firms are performing.
The Fed chief didn’t discuss the outlook for the economy or monetary policy. Speaking on April 27 at his first regular press conference, Bernanke signaled that the central bank will maintain its record stimulus after June and indicated that the need to contain inflation means further easing is unlikely.
The 18-month contraction that ended in June 2009 was the longest since the 43-month slump during the Great Depression, according to the National Bureau of Economic Research.
U.S. banks have mounted a campaign against one Fed regulation under Dodd-Frank to cap “swipe” fees on debit cards. Bernanke said in March that the Fed would miss an April deadline for the rule, telling lawmakers the issues raised in more than 11,000 comment letters are “complex and difficult.”
Last week, the Treasury Department proposed exempting foreign-exchange swaps and forwards from most of the derivatives rules required under the Dodd-Frank Act, saying the market already meets many of the law’s objectives.
A coalition of 20 firms, including Deutsche Bank AG, Bank of New York Mellon Corp. and UBS AG, asked Treasury Secretary Timothy F. Geithner to grant an exemption in a November letter.
Responding to questions after the speech, Bernanke said so-called “stress tests” of banks will be a “common event” after the initial Fed-led project in 2009 helped stabilize the financial system.
The central bank hasn’t decided yet how much information to release from future tests and is trying to balance the banks’ privacy with openness, he said. The data probably won’t be as detailed as in 2009, Bernanke said.