The Federal Reserve plans to maintain broad regulations over the banking industry, Chairman Ben Bernanke said during the week of March 15.
Bernanke recommended tougher capital requirements for big banks, limits on investments by money-market mutual funds, and the U.S. government possibly running some big financial institutions temporarily.
“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,” Bernanke told the Wall Street Journal.
Bernanke said he wants to keep his role as watchdog over smaller institutions as well. He said he believes that a closer connection with community banks will give the federal government a better understanding of commercial real-estate and small-business lending.
However, a bill sponsored by Sen. Christopher Dodd (D-Conn.) would strip the Federal Reserve of its power to supervise banks and holding companies with assets less than $50 billion. The legislation is scheduled to be debated in the Senate on March 22.
Dodd pointed to testimony from former Federal Reserve Vice Chairperson Alice Rivlin, who said the Fed does not benefit from monitoring smaller institutions.
“I didn’t really experience that we learned a lot from supervising particular banking institutions which was useful to monetary policy,” Rivlin told the Senate Banking, Housing and Urban Affairs Committee in July.
Bernanke disagreed, saying he believes there cannot be a true assessment of financial markets without knowledge of all institutions involved in them, small and large.
“A supervisory agency that focused only on the largest banking institutions, without knowledge of community banks, would get a limited and potentially distorted picture of what was happening in our banking system as a whole,” Bernanke told Reuters.