Federal Reserve Chairman Ben Bernanke on Thursday offered one of his most aggressive defenses of the central banks role in the future of bank supervision in response to a question from Sen. Richard Shelby (R., Ala.) during an appearance on the Senate Banking Committee.
Heres his response to a question about why the Fed should be the top cop for large financial companies:
I think that stripping the Federal Reserve of supervisory authorities in the light of the recent crisis would be a grave mistake for several reasons.
“First, weve learned from the crisis large complex financial firms that pose a threat to the stability of the financial system need strong consolidated supervision. That means they need to be seen and overseen as a complete company, reflecting the developments not only in their banks but also in their securities dealers and various aspects of their operations. A bank supervisor, which focuses on looking at credit files, is not prepared to look at the wide range of activities of a complex international financial firm. The Federal Reserve, in contrast, by virtue of its efforts in monetary policy, has substantial knowledge of financial markets, payments systems, economics and a wide range of areas other than just bank supervision. And in our stress tests, we demonstrated that we can use that whole range of multidisciplinary skills to do a better job of consolidated oversight. By the same token, we need to look at systemic risks. Systemic risks themselves also involve risks that can span across companies and into various markets. There, again you need an institution that has a breadth of skills. Its hard for me to understand why in the face of a crisis that was so complex and covered so many markets and institutions, you would want to take out of the regulatory system the one institution that has the full breadth and range of those skills to address those issues.