WASHINGTON BUREAU — Federal Reserve Board Chairman Ben Bernanke today said the financial crisis has demonstrated the need for “systemically important” insurers to come under the kind of consolidated supervision that now applies to bank holding companies.
The Federal Reserve is well-suited to the task of being the consolidated supervisor for systemically important non-banks, Bernanke said.
Bernanke said the country also needs a system for “resolving” large insurers and other non-banks such as insurers “analogous to the regime currently used by the Federal Deposit Insurance Corporation,” Bernanke said.
He made his comments in testimony before the House Financial Services Committee.
During the hearing, Bernanke called for creation of an oversight council made up of all the agencies involved in financial supervision. The council should have the authority to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies’ responses to potential systemic risks, he said.
Moreover, he said, all federal financial supervisors and regulators–not just the Federal Reserve System–should be directed and empowered to consider the risks facing the broader financial system as part of their normal oversight responsibilities.
But putting all systemically important financial institutions under the jurisdiction of the Federal Reserve would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight, Bernanke said.
“Besides being supervised on a consolidated basis, systemically important financial institutions should also be subject to enhanced regulation and supervision, including capital, liquidity, and risk-management requirements that reflect those institutions’ important roles in the financial sector,” he said. “Enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to reduce the incentives for financial firms to become very large in order to be perceived as too big to fail.”
Bernanke touched only briefly on an Obama administration proposal to create an independent Consumer Finance Protection Agency. Some say the proposal, now being debated in the House, would reduce the Fed’s power.
That drew a rebuke from Rep. Melvin Watt, D-N.C. “Five sentences on consumer protection when everything else gets substantially more space,” Watt said. “It is just not a good message to send.”
Committee Republicans tore into Bernanke’s testimony.
“Chairman Bernanke, in the run-up to the worst financial and economic crisis since the Great Depression, the Federal Reserve offered few warnings of the forces undermining the foundations of our markets and the industrial and commercial structures on which we depend,” said Rep. Spencer Bachus, R-Ala., the highest ranking Republican on the panel. “And yet, we are now asked to designate the Federal Reserve as the agency in which we place our trust as the systemic risk regulator to protect against the forces that will endanger the economy in the future.”
Republicans are proposing to strip the Fed of its regulatory and supervisory powers and leave it only with the authority to conduct monetary policy.
Republicans want to create a council “with members from a broad spectrum of agencies” to oversee financial institutions.