Bernanke Says “Grave Mistake” to Strip Fed of Supervisory Authorities

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Stripping the Federal Reserve Board of its supervisory authorities, in light of the recent financial crisis, would be a “grave mistake,” Fed Chairman Ben Bernanke told the Senate Banking Committee Feb. 25, 2010.

In the second day of his semiannual monetary report to Congress, Bernanke argued that large, complex financial firms that pose a threat to the financial system need strong, consolidated supervision. “That means they need to be seen and overseen as a complete company,” Bernanke said in response to questioning from ranking member Sen. Richard Shelby, R-Ala.

The Fed, Bernanke stressed, has “substantial knowledge of financial markets, payment systems, economics and a wide range of areas other than just bank supervision.” He added that the recent bank stress tests indicate that the Fed can use a whole range of multidisciplinary skills to conduct consolidated oversight.

“It’s hard for me to understand why in the face of a crisis that was so complex…you would want to take out of the regulatory system the one institution that has the full breadth and range of those skills to address those issues,” he told the committee.

Bernanke acknowledged that the Fed had made mistakes in its supervisory role, “but we were hardly alone in that respect,” he added.

Asked to comment on the proposed Volcker Rule, which would block any bank from owning a hedge fund or private equity fund, or from participating in proprietary trading unrelated to client business, Bernanke said it would be difficult to implement on a purely legislative basis due to the potential for unintended consequences. “I do think if you want to go in that direction you should at least involve some role for supervisors to make determinations for individual activities,” he said.