11 March 2009

Bernanke outlines possible reforms to financial architecture

“We must have a strategy that regulates the financial system as a whole”, Fed Chairman Ben Bernanke said. “Strong and effective regulation and supervision of banking institutions are not sufficient by themselves to achieve this aim"

“We must have a strategy that regulates the financial system as a whole”, Fed Chairman Ben Bernanke said. “Strong and effective regulation and supervision of banking institutions are not sufficient by themselves to achieve this aim”.

Main elements of such a strategy include addressing the problem of financial institutions that are deemed too big or perhaps too interconnected to fail. The financial infrastructure must be strengthened, regulatory policies and accounting rules have to reviewed, and the creation of an authority specifically charged with monitoring and addressing systemic risks has to be considered.

Any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition, and be held to high capital and liquidity standards, Bernanke underlined and called for a robust framework for consolidated supervision of all systemically important financial firms organized as holding companies.

The US also needs improved tools to allow the orderly resolution of a systemically important non-bank financial firm, he outlined.

The potential fragility of the money market mutual fund sector also requires politicians to consider how to increase the resiliency of those funds that are susceptible to runs, Bernanke said. One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, or to develop a limited system of insurance, he said.

Full speech

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