Federal Reserve Chairman Ben Bernanke on Tuesday outlined steps he thinks would help avert future financial crises, saying the time for such a longer-term discussion has come.
In remarks to the Council on Foreign Relations, Mr. Bernanke also issued a mea culpa of sorts for the current global financial crisis on behalf of the U.S. and some other big economies that failed to "prudently" invest the rush of capital inflows that started more than a decade ago.
"The responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States," Mr. Bernanke said. The "failure" of the U.S. and other big economies to do so "has led to a powerful reversal in investor sentiment and a seizing up of credit markets," he said.
"In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," Mr. Bernanke said. In the U.S., officials are determined "to ensure that systemically important financial institutions continue to be able to meet their commitments," Mr. Bernanke said.
"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said.
But even as Mr. Bernanke and others focus on stabilizing markets in the short term, he signaled it isn't too early to consider longer-term reforms including -- in the U.S. -- putting responsibility for addressing possible systemic risks with one authority, such as the Fed.
He outlined four steps related to: systemically important and interconnected firms; financial infrastructure; regulation; and addressing systemic risks under one authority.
Referring to big interconnected firms, known as "too big to fail," Mr. Bernanke said "any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition, and be held to high capital and liquidity standards."
Mr. Bernanke also suggested ways to address the "potential fragility" of money-market mutual funds. "One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity," Mr. Bernanke said.
"A second approach would be to develop a limited system of insurance for money-market mutual funds that seek to maintain a stable net asset value," he said.
Officials should also consider changes to deposit-insurance funding, Mr. Bernanke said, such as raising reserve ratios in good times to create a buffer that can be drawn on in down times.
As for placing responsibility for overall systemic risk with one authority, Mr. Bernanke noted that "some commentators have proposed that the Federal Reserve take on the role of systemic risk authority" while "others have expressed concern that adding this responsibility would overburden the central bank."
Whether the Fed's right for the job depends on how Congress defines the role of the new authority, Mr. Bernanke said.
"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.
The Fed Chairman also took several questions from the audience. He was asked about his views on mark-to-market, to which he responded that it did not need to be removed, but it should be altered. He continued that there is no easy way to price the securities (due to an illiquid market) so that aspect must be addressed. By simply removing mark-to-market, it would create an additional cloud of confusion and uncertainty and that is also not a good solution. There are some responsible solutions, but none have been put forward yet.
One question that was somewhat amusing to the Chairman was a question about The Fed essentially controlling the regulations that came out of Congress. Mr. Bernanke said that having The Federal Reserve try to control the very institution that created The Federal Reserve would be difficult.
Source: The Wall Street Journal
In remarks to the Council on Foreign Relations, Mr. Bernanke also issued a mea culpa of sorts for the current global financial crisis on behalf of the U.S. and some other big economies that failed to "prudently" invest the rush of capital inflows that started more than a decade ago.
"The responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States," Mr. Bernanke said. The "failure" of the U.S. and other big economies to do so "has led to a powerful reversal in investor sentiment and a seizing up of credit markets," he said.
"In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," Mr. Bernanke said. In the U.S., officials are determined "to ensure that systemically important financial institutions continue to be able to meet their commitments," Mr. Bernanke said.
"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said.
But even as Mr. Bernanke and others focus on stabilizing markets in the short term, he signaled it isn't too early to consider longer-term reforms including -- in the U.S. -- putting responsibility for addressing possible systemic risks with one authority, such as the Fed.
He outlined four steps related to: systemically important and interconnected firms; financial infrastructure; regulation; and addressing systemic risks under one authority.
Referring to big interconnected firms, known as "too big to fail," Mr. Bernanke said "any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition, and be held to high capital and liquidity standards."
Mr. Bernanke also suggested ways to address the "potential fragility" of money-market mutual funds. "One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity," Mr. Bernanke said.
"A second approach would be to develop a limited system of insurance for money-market mutual funds that seek to maintain a stable net asset value," he said.
Officials should also consider changes to deposit-insurance funding, Mr. Bernanke said, such as raising reserve ratios in good times to create a buffer that can be drawn on in down times.
As for placing responsibility for overall systemic risk with one authority, Mr. Bernanke noted that "some commentators have proposed that the Federal Reserve take on the role of systemic risk authority" while "others have expressed concern that adding this responsibility would overburden the central bank."
Whether the Fed's right for the job depends on how Congress defines the role of the new authority, Mr. Bernanke said.
"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.
The Fed Chairman also took several questions from the audience. He was asked about his views on mark-to-market, to which he responded that it did not need to be removed, but it should be altered. He continued that there is no easy way to price the securities (due to an illiquid market) so that aspect must be addressed. By simply removing mark-to-market, it would create an additional cloud of confusion and uncertainty and that is also not a good solution. There are some responsible solutions, but none have been put forward yet.
One question that was somewhat amusing to the Chairman was a question about The Fed essentially controlling the regulations that came out of Congress. Mr. Bernanke said that having The Federal Reserve try to control the very institution that created The Federal Reserve would be difficult.
Source: The Wall Street Journal
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