Fed Chairman Ben Bernanke said the plan to end the belief that some banks are too big to fail is “moving in the right direction.” He predicted that over time there will be increased market expectations that certain large institutions can fail during questioning at a Senate Banking Committee hearing Feb. 26, 2013 (webcast), when he gave his semiannual report on monetary policy. Bernanke noted that progress had been made on the Federal Deposit Insurance Corp.'s orderly liquidation authority and on living wills. “If additional steps are needed, then Congress obviously can discuss those,” Bernanke told Sen. Elizabeth Warren, D-Mass. He added that the benefits associated with large banks are going to decline over time, meaning that “some banks are going to voluntarily begin to reduce their size because they're not getting the benefit that they used to get.”
Bernanke forecast that a final rule on Basel III should be out by the middle of this year. “Virtually all of our banks are already well on track to meet the Basel III requirements, so it's not a question of the banks not being adequately capitalized; they are already either at or about to reach the Basel III capital levels,” he said.
Turning to progress on the Volcker Rule, Bernanke noted that the issue at this point is “finding agreement and closure among the different agencies who are working on the rule.” He described the current proposal as “really three or four different rules,” reflecting the input of the various regulatory agencies involved. He told the committee that it would be much better for those rules to be closely coordinated and as close to identical as possible.
In his prepared testimony on monetary policy, Bernanke told the committee that the “pause” in economic growth in the last quarter of 2012 probably was related to bad weather, not to a slowing of the economic recovery. He noted a gradual improvement in the labor market, although unemployment remains high and under-employment also is a problem. The Federal Open Market Committee continues to believe that inflation will remain at or less than the long-term target of 2 percent, Bernanke said. He claimed that the FOMC's monetary policies have contributed to the recovery of the housing market and to increased sales of cars and other durable goods. He added that the FOMC is monitoring the potential ill effects of the low federal funds target rate and other policies to make sure that they do not encourage undesirable inflation or risk financial stability.
Following the hearing, Sen. Bob Corker, R-Tenn., sent Bernanke a letter asking him to clarify what it means and whether or not it matters if the Fed loses money as a result of its large balance sheet asset purchases.