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28 October 2009

Bernanke’s speech on FED’s role on financial supervision and regulation

Bernanke: legislative action is needed to push forward the new financial regulation proposals. The Congress should ensure that all systemically important financial institutions are subject to robust and consolidated supervision regimes.

Bernanke focused his speech on the following three areas:

·          Strengthening Regulations and Guidance. The FED has played a key part in the international effort, working through organizations such as the Basel Committee on Bank Supervision and the Financial Stability Board. For example, the FED were extensively involved in the Basel Committee's recent decision to strengthen capital requirements for trading activities and securitizations, and it continues to work with domestic and foreign supervisors to raise capital requirements for other types of on- and off-balance-sheet exposures.
·         Making supervision more effective: the FED issued guidance a year ago updating its approach to consolidated supervision, tying it more explicitly to the systemic significance of individual holding companies and their business lines, such as core clearing and settlement activities, as well as activities in critical financial markets. Strengthened consolidated supervision also supports improved oversight of institutions' compliance with consumer protections. Indeed, building on a pilot project the FED launched in 2007, it recently announced a consumer compliance examination programme for non-bank subsidiaries of bank-holding companies, as well as of foreign banking organizations.
·         Need for legislative action: though the FED and other supervisors in the United States and abroad are strengthening the existing regulatory and supervisory framework, it remains critical for the Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks. The Congress should ensure that all systemically important financial institutions are subject to robust regimes for consolidated prudential supervision. Consolidated supervision of systemically important institutions, together with tougher capital, liquidity, and risk-management requirements for those firms, is needed not only to protect the firms' stability and that of the financial system as a whole, but also to reduce firms' incentive to grow very large in order to be perceived as too big to fail.
He concluded by saying that regulators and supervisors can do a great deal, but comprehensive financial reform requires action by the Congress. Strengthening consolidated supervision, setting up a mechanism (such as a systemic oversight council) to identify and monitor risks to financial stability, and creating a framework that allows for the safe unwinding of failing, systemically critical firms are among the essential ingredients of a new system that will reduce the probability of future crises and greatly mitigate the severity of any that occur.


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