WASHINGTON - Though the Federal Reserve Board's reputation is built on its management of monetary policy, Chairman Ben Bernanke said Wednesday that the role of banking supervision at the central bank needs to be revisited.
"One of the key issues that's going to be debated as we look at the problem of bubbles in the future is what should be the leading approach," he told the Economic Club of New York. "Should it be monetary policy, or should it be supervision and regulatory policy? I do believe the latter does have a significant role to play in constraining excessive leverage, excessive risk taking and the other elements that lead to bubbles."
The comments were Bernanke's most expansive discussion of the economy and the banking industry since Congress gave the Treasury Department authority this month to purchase troubled assets and take equity stakes in financial institutions. Though Bernanke acknowledged the severity of the industry's troubles, he said the Fed is responding differently than it did when turmoil at banks led to the Great Depression.
"We didn't wait for three-and-a-half years as the financial market collapsed to take action, strong action, to stabilize the financial system," he said. "The actions taken this week, together with all the efforts that have been ongoing with the provision of liquidity and other things over the past year, are powerful steps to try to stabilize the financial system."
In a reminder of the tough job that still lies ahead for Bernanke, the Fed released its periodic study of economic conditions Wednesday, which indicated credit conditions nationwide are still tight. As the financial crisis deepens, the Fed said, loan quality continued to decline in several of its districts.
Several bankers told the Fed that customers are "taking steps to ensure that existing deposits are covered by insurance," and that withdrawals increased after reports of bank closings last month.
The Bush administration has been criticized in recent weeks for favoring policies, such as its recapitalization plan, that would provide the most help to the nation's largest banking companies, including the Fed's recent approval of Wells Fargo & Co.'s deal to acquire Wachovia Corp.
Still, Bernanke stressed Wednesday that he did not want a banking system dominated by massive institutions.
"I don't want to see this country go to the point where we have six large banks," he said. "We need to have that diversity. We need to have the information capital, the local knowledge that is incorporated in local lending, local community banking, and diversity of different types of community institutions. That's an important policy consideration in the long run."
Bernanke reiterated his "very serious" concern that some institutions are viewed as "too big to fail" by the market. "There are too many firms that are in some sense systemically critical," the Federal Reserve chairman said.
He also defended the government's decision to let Lehman Brothers file for bankruptcy protection, even though the Fed bailed out American International Group days later. Unlike Bear Stearns, which the Fed rescued in March, Lehman had no acceptable collateral it could provide the central bank, Bernanke said.
"The Federal Reserve's ability to lend, which was used in the Bear Stearns case, for example, requires that adequate collateral be posted so we are not taking credit risk," he said. "In this case, that was impossible. There simply wasn't enough collateral to support the lending."
SEC, FINRA Announce Second CCOutreach BD National Seminar
The Securities and Exchange Commission and the Financial Industry Regulatory Authority announced the second annual CCOutreach BD National Seminar will be held on March 10, 2009.
Like the SEC's CCOutreach program for chief compliance officers at mutual fund companies, the CCOutreach DB National Seminar is organized for CCOs, but at broker/dealers. It will focus on compliance risks, controls and programs. Following the national seminar, the SEC and FINRA will hold five regional CCOutreach BD seminars.
"The CCOutreach BD program has proven invaluable in helping the SEC understand the needs and concerns of compliance officers," said SEC Chairman Christopher Cox. "This national seminar is an outstanding opportunity for broker/dealer CCOs and their regulators to discuss how to strengthen compliance within the securities laws. This two-way communication is focused directly on real-world problems. And it's built on the shared conviction that empowering CCOs to implement strong compliance programs within their firms will prevent securities laws violations and better serve investors."
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