Reform Must Ensure Stability of Financial System said USA
By Merle David Kellerhals, Jr.
Focusing supervision too narrowly on the safety and soundness of individual financial institutions can blind regulators to emerging threats to financial stability that cut across many companies or markets, Federal Reserve Chairman Ben Bernanke says.
That means that a critical building block for success in financial supervision is a requirement that all financial institutions considered "too big to fail" be subjected to consolidated supervision, Bernanke says. It means that one regulator must be responsible and able to review the full range of activities of such institutions, he added.
"Before the recent financial crisis, many major financial firms - including investment banks like Bear Stearns and Lehman Brothers and large insurance companies like American International Group - were able to avoid robust comprehensive supervision," Bernanke said at the Squam Lake Conference in New York June 16. "In the future, all firms that present systemic risks - regardless of whether they happen to own an insured depository institution - must be subject to a common, comprehensive framework of supervision and regulation."
Bernanke said that financial reform bills that were passed by the U.S. House of Representatives and the Senate would expand and strengthen consolidated supervision of companies whose failure would pose risks to the entire financial system. Those measures are now being consolidated by a conference committee of senators and representatives and will be returned to both chambers for final consideration before being sent to the president for final action. Congress set a target of July 4 for sending the reform package to President Obama.
A report from the Squam Lake Group, which is a small group of economists from major U.S. colleges and policy research centers, has recommended that a single regulator be assigned responsibility for overseeing the health of the overall U.S. financial system. The group recommended that the nation's central bank - the U.S. Federal Reserve - have that responsibility. Bernanke said the Federal Reserve should be extensively involved in the collective effort to promote financial stability.
"The reasons for this involvement include the central bank's breadth of expertise and its traditional roles in promoting financial stability and serving as a backstop liquidity [cash] provider to the financial system," Bernanke said. But he cautioned that giving total supervisory responsibility to a single regulator risks creating blind spots, especially in the skills and experience needed to oversee the many parts of a complex financial system.
The Federal Reserve prefers that all regulatory agencies be required routinely to factor broad considerations into supervision, thus helping ensure that risks to financial stability can be addressed wherever they arise, he added.
And to minimize future financial crisis like the recession of 2008-2009, Bernanke said reform will require tougher standards for financial institutions, as well as more intense supervision. These institutions should have to meet stronger capital and liquidity standards along with "more-stringent" risk-management requirements, he added.
The Federal Reserve is already working domestically and internationally to increase the quantity and quality of "regulatory capital" - cash on hand - that banks are required to hold, he said. The thrust of those requirements is to make companies better able to withstand systemwide shocks.
"To be sure, reasonable transition periods will be necessary to allow banks to meet these more demanding standards without unduly constricting credit or endangering the recovery," Bernanke said.
The Squam Lake Group on Financial Regulation is a nonpartisan, nonaffiliated group of 15 academics and policy specialists who came together to offer guidance on the reform of financial regulation. The group took its name from its first meeting at New Hampshire's Squam Lake in fall 2008 amid the deepening capital-markets crisis.
G20 SUMMIT
Bernanke and U.S. Treasury Secretary Timothy Geithner recently returned from a conference in Busan, South Korea, of finance ministers and central bank governors of the Group of 20 (G20) major economies. The G20 is trying to make sure it has a strong, common strategy for economic growth and for financial reforms.
"Last year, the G20 acted to restore growth to a world in crisis. Because we acted together, the global economy is expanding again," Geithner said June 5 at a meeting of G20 finance ministers and central bank governors. The International Monetary Fund (IMF) has forecast global growth to exceed 4 percent this year and in 2011.
The finance ministers and central bankers met June 4-5 to prepare for the G20 Summit in Toronto on June 26-27. A second G20 summit is scheduled for Seoul, South Korea, November 11-12. The economic talks focused on two core priorities: economic growth and financial reform, Geithner said. The ministers reaffirmed support for the current recovery in private demand across the G20 economies, and also agreed on the need for reforms that would support short-term demand and boost longer-term growth.
By the Bureau of International Information Programs, U.S. Department of State
Focusing supervision too narrowly on the safety and soundness of individual financial institutions can blind regulators to emerging threats to financial stability that cut across many companies or markets, Federal Reserve Chairman Ben Bernanke says.
That means that a critical building block for success in financial supervision is a requirement that all financial institutions considered "too big to fail" be subjected to consolidated supervision, Bernanke says. It means that one regulator must be responsible and able to review the full range of activities of such institutions, he added.
"Before the recent financial crisis, many major financial firms - including investment banks like Bear Stearns and Lehman Brothers and large insurance companies like American International Group - were able to avoid robust comprehensive supervision," Bernanke said at the Squam Lake Conference in New York June 16. "In the future, all firms that present systemic risks - regardless of whether they happen to own an insured depository institution - must be subject to a common, comprehensive framework of supervision and regulation."
Bernanke said that financial reform bills that were passed by the U.S. House of Representatives and the Senate would expand and strengthen consolidated supervision of companies whose failure would pose risks to the entire financial system. Those measures are now being consolidated by a conference committee of senators and representatives and will be returned to both chambers for final consideration before being sent to the president for final action. Congress set a target of July 4 for sending the reform package to President Obama.
A report from the Squam Lake Group, which is a small group of economists from major U.S. colleges and policy research centers, has recommended that a single regulator be assigned responsibility for overseeing the health of the overall U.S. financial system. The group recommended that the nation's central bank - the U.S. Federal Reserve - have that responsibility. Bernanke said the Federal Reserve should be extensively involved in the collective effort to promote financial stability.
"The reasons for this involvement include the central bank's breadth of expertise and its traditional roles in promoting financial stability and serving as a backstop liquidity [cash] provider to the financial system," Bernanke said. But he cautioned that giving total supervisory responsibility to a single regulator risks creating blind spots, especially in the skills and experience needed to oversee the many parts of a complex financial system.
The Federal Reserve prefers that all regulatory agencies be required routinely to factor broad considerations into supervision, thus helping ensure that risks to financial stability can be addressed wherever they arise, he added.
And to minimize future financial crisis like the recession of 2008-2009, Bernanke said reform will require tougher standards for financial institutions, as well as more intense supervision. These institutions should have to meet stronger capital and liquidity standards along with "more-stringent" risk-management requirements, he added.
The Federal Reserve is already working domestically and internationally to increase the quantity and quality of "regulatory capital" - cash on hand - that banks are required to hold, he said. The thrust of those requirements is to make companies better able to withstand systemwide shocks.
"To be sure, reasonable transition periods will be necessary to allow banks to meet these more demanding standards without unduly constricting credit or endangering the recovery," Bernanke said.
The Squam Lake Group on Financial Regulation is a nonpartisan, nonaffiliated group of 15 academics and policy specialists who came together to offer guidance on the reform of financial regulation. The group took its name from its first meeting at New Hampshire's Squam Lake in fall 2008 amid the deepening capital-markets crisis.
G20 SUMMIT
Bernanke and U.S. Treasury Secretary Timothy Geithner recently returned from a conference in Busan, South Korea, of finance ministers and central bank governors of the Group of 20 (G20) major economies. The G20 is trying to make sure it has a strong, common strategy for economic growth and for financial reforms.
"Last year, the G20 acted to restore growth to a world in crisis. Because we acted together, the global economy is expanding again," Geithner said June 5 at a meeting of G20 finance ministers and central bank governors. The International Monetary Fund (IMF) has forecast global growth to exceed 4 percent this year and in 2011.
The finance ministers and central bankers met June 4-5 to prepare for the G20 Summit in Toronto on June 26-27. A second G20 summit is scheduled for Seoul, South Korea, November 11-12. The economic talks focused on two core priorities: economic growth and financial reform, Geithner said. The ministers reaffirmed support for the current recovery in private demand across the G20 economies, and also agreed on the need for reforms that would support short-term demand and boost longer-term growth.
By the Bureau of International Information Programs, U.S. Department of State