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Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pressed for greater supervision of the nation's financial institutions, and the creation of a system that could handle the failure of large securities companies.
Regulators need emergency authority to step in to limit temporary disruptions to financial markets, Paulson told Congress. These authorities should be flexible, and the trigger for invoking such authority should be very high, such as a bankruptcy filing.
“Legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers”, Bernanke said. “The Congress should consider requiring consolidated supervision of holding companies and providing the regulator the authority to set standards for capital, liquidity holdings, and risk management”, he added.
“The stability of the broader financial system requires key payment and settlement systems to operate smoothly under stress and to effectively manage counterparty risk”, Bernanke continued and asked the Congress consider granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.
According to Paulson financial institutions must be allowed to fail to effectively constrain market discipline. “Steps are being taken to improve market infrastructure, especially where our financial firms are highly intertwined - the OTC derivatives market and the tri-party repurchase agreement market, which is the marketplace through which our financial institutions obtain large amounts of secured funding“, he said.