22 August 2008

Bernanke calls for increased focus on systemwide risks by regulators and supervisors

Ben Bernanke called for closer cooperation with other regulators to monitor the health of individual financial institutions. An increased focus on system-wide risks by regulators and supervisors is inevitable and desirable, he said.

The chairman of the Federal Reserve, Ben Bernanke, called for closer cooperation with other regulators to monitor the health of individual financial institutions. A critical question is how to strengthen our financial system, including our system of financial regulation and supervision, to reduce the frequency and severity of bouts of financial instability in the future, he said. Some particularly thorny issues are raised by the existence of financial institutions that may be perceived as "too big to fail" and the moral hazard issues that may arise when governments intervene in a financial crisis, he explained.

 

Bernanke wants the Fed to have a more explicit role overseeing the plumbing of the financial system. The best ways to protect the financial system against future systemic shocks, including the possible failure of a major counterparty, is by strengthening the financial infrastructure, including both the "hardware" and the "software" components, he said, pointing not only to the execution, clearing, and settlement of transactions, but also on the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction.

 

He remarked that the Federal Reserve does not have general statutory authority to oversee these systems. “Instead, we rely on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion, to help ensure that the various payment and settlement systems have the necessary procedures and controls in place to manage the risks they face”, he complained and called the Congress should consider granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.

 

He would also like for bank regulation to focus more on ensuring that the financial system as a whole is in sound shape, not just on the risks facing any given bank. "An expectation by financial market participants that financial crises will never occur would create its own form of moral hazard," Bernanke said, "and encourage behavior that would make financial crises more, rather than less, likely."

 

“I believe that an increased focus on system-wide risks by regulators and supervisors is inevitable and desirable”, he said. But he also warned that “we should be careful about over-promising, as we are still rather far from having the capacity to implement such an approach in a thoroughgoing way.”

 

Full speech

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