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“The financial stress we continue to experience arose from the problematic implementation of the so-called originate-to-distribute approach to credit extension”, Federal Reserve Chairman Ben Bernanke said and called for substantial improvements.
The financial turmoil demonstrated the importance of generous capital cushions, Bernanke noted, stating that problems occurred at each step of the credit-extension chain. “I strongly urge financial institutions to remain proactive in their capital-raising efforts”, he said. “Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.”
“We are also considering the need for additional or revised supervisory guidance regarding various aspects of risk management”, Bernanke said, “including further emphasis on the need for an enterprise-wide perspective when assessing risk.”
The capital requirements set by the newly introduced Basel II regulatory standards will help bring more discipline to the industry but won't be a panacea, Bernanke said. “Although Basel II will by no means eliminate future episodes of financial turbulence, it should help to make financial institutions more resilient to shocks and thus enhance overall financial stability”, he noted.