NEW YORK – The Federal Reserve should retain its supervisory role over large, complex financial institutions because it has an expertise that gives it an edge, Federal Reserve Board Chairman Ben S. Bernanke will testify before Congress today.
“The Federal Reserve's wide range of expertise makes it uniquely suited to supervise large, complex financial institutions and to help identify risks to the financial system as a whole. Moreover, the insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability,” he will testify before the House Committee on Financial Services, according to prepared testimony released by the Fed this morning. “While we await enactment of comprehensive financial reform legislation, we have undertaken an intensive self-examination of our regulatory and supervisory performance. We are strengthening regulation and overhauling our supervisory framework to improve consolidated supervision as well as our ability to identify potential threats to the stability of the financial system. And we are taking steps to strengthen the oversight and effectiveness of our supervisory activities."
By its regulatory and supervisory roles, the Fed, he said, can “address both safety and soundness risks and risks to the stability of the financial system as a whole.” Also, as an overseers of banks, the Fed is better capable of setting monetary policy, “lending through the discount window, and fostering financial stability,” he said.
Bernanke boasted the Fed’s “expertise in examinations of risk-management practices” culled over “its long experience supervising banks of all sizes, including community banks and regional banks.”
In order to manage “large, complex financial institutions” and foresee potential risks requires “not only traditional examination skills, but also a number of other forms of expertise, including macroeconomic analysis and forecasting; insight into sectoral, regional, and global economic developments; knowledge of a range of domestic and international financial markets, including money markets, capital markets, and foreign exchange and derivatives markets; and a close working knowledge of the financial infrastructure, including payment systems and systems for clearing and settlement of financial instruments,” he said.
He detailed how the Fed has acquired each of these skills, for example, macroeconomic forecasting is used in setting of monetary policy.
“Even as the Federal Reserve's central banking functions enhance its supervisory expertise, its involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve's ability to effectively carry out its central-bank responsibilities,” Bernanke said. Also, its supervisory role helps the Fed in monetary policy and managing the discount window.
The Fed learns “about conditions and prospects across the full range of financial institutions, not just the very largest, and provides useful information about the economy and financial conditions throughout the nation,” he added.
Bernanke said the Fed backs Congressional financial regulation reform efforts, and “has been conducting an intensive self-examination of our regulatory and supervisory performance and have been actively implementing improvements.”
Improvements include changes to its supervisory framework, taking “a more explicitly multidisciplinary approach,” and expanded “use of horizontal reviews that look across a group of firms to identify common sources of risks and best practices for managing those risks.”
He added, the Fed is “developing an off-site, enhanced quantitative surveillance program for large bank holding companies that will use data analysis and formal modeling to help identify vulnerabilities at both the firm level and for the financial sector as a whole. This analysis will be supported by the collection of more timely, detailed, and consistent data from regulated firms.”
Bernanke is expected to present his testimony at 2 p.m., EDT, today.
