NEW YORK – While “financial conditions have improved considerably,” and no global financial collapse occurred, the severe fallout from the financial crisis should prompt policymakers “to take action to reduce the probability and severity of any future crises,” Federal Reserve Board Chairman Ben S. Bernanke said today.
“Although the crisis was an extraordinarily complex event with multiple causes, weaknesses in the risk-management practices of many financial firms, together with insufficient buffers of capital and liquidity, were clearly an important factor,” Bernanke said at a Federal Reserve Bank of Boston conference, according to prepared text released by the Fed. He added, “regulators and supervisors did not identify and remedy many of those weaknesses in a timely way. Accordingly, all financial regulators, including of course the Federal Reserve, must take a hard look at the experience of the past two years, correct identified shortcomings, and improve future performance.”
The Fed, he said, wants to “ensure that large, systemically critical financial institutions hold more and higher-quality capital, improve their risk-management practices, have more robust liquidity management, employ compensation structures that provide appropriate performance and risk-taking incentives, and deal fairly with consumers.” Efforts are also being made to beef up oversight and enforcement, “particularly at the firmwide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or systemwide, approach that should help us better anticipate and mitigate broader threats to financial stability.”
Bernanke said Congress must also act. “We have seen numerous instances when weaknesses and gaps in the regulatory structure itself contributed to the crisis, many of which can only be addressed by statutory change. Notably, to promote financial stability and to address the extremely serious problem posed by firms perceived as ‘too big to fail,’ legislative action is needed to create new mechanisms for oversight of the financial system as a whole; to ensure that all systemically important financial firms are subject to effective consolidated supervision; and to establish procedures for winding down a failing, systemically critical institution without seriously damaging the financial system and the economy.”
