08 May 2009

Bernanke calls for more macro-prudential approach to supervision

Our regulatory system must include the capacity to monitor, assess, and address potential systemic risks within the financial system including providing a resolution mechanism to safely wind down failing, systemically important institutions.

Federal Reserve Chairmen Ben Bernanke reiterated that all systemically important financial firms, and not just those affiliated with a bank, should be subject to a robust framework for consolidated supervision, calling on the Congress to revise the provisions of Gramm-Leach-Bliley.

 

With regard to the Financial Stability aspect, Bernanke called for a more effective infrastructure for the arrangements for clearing and settling credit default swaps and other over-the-counter derivatives. “We are creating increasingly stringent targets and performance standards for market participants”, he said.

 

He also underlined that a more macro-prudential approach to supervision could help to enhance overall financial stability. “Our regulatory system must include the capacity to monitor, assess, and, if necessary, address potential systemic risks within the financial system”, he said.

 

Elements of a macro-prudential agenda include:

Ø       monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;

Ø       assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;

Ø       analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms;

Ø       ensuring that each systemically important firm receives oversight commensurate with the risks that its failure would pose to the financial system;

Ø       providing a resolution mechanism to safely wind down failing, systemically important institutions;

Ø       ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;

Ø       working to mitigate procyclical features of capital regulation and other rules and standards; and

Ø       identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole.

 

Full speech

 

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