Bernanke Sees “Critical” Need for Congress to Close Regulatory Gaps

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Oct. 23, 2009.

Federal Reserve Board Chairman Ben Bernanke said it remains “critical” for Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks.

Speaking October 23 at a Federal Reserve Bank of Boston conference Bernanke said Congress must ensure that all systemically important firms, including those that do not own a bank, are subject to a robust regime for consolidated prudential supervision. Tougher capital, liquidity and risk-management requirements for such firms are also needed not only to protect the stability of the financial system, but to reduce their incentive to grow large in order to be perceived as too big to fail, Bernanke said.

Congress should also create a new set of authorities to facilitate the orderly resolution of failing, systemically important financial firms, he added, and reiterated support for the creation of a systemic oversight council comprised of the principal financial regulators.

Meanwhile, Bernanke stated that systemically important financial institutions could face a capital surcharge or the requirement that a greater share of their capital exist in the form of common equity as part of ongoing efforts to improve the safety of the financial system.

Bernanke noted that for additional protection systemically important institutions could be required to issue contingent capital, such as debt-like securities that convert to common equity in times of stress.

Bernanke said that “stress tests” on the country’s 19 largest banking organizations had resulted in increased capital buffers and investor confidence, but added that “additional steps are necessary to ensure that all banking organizations hold adequate capital.”

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