Bernanke's testimony on regulatory reform

WASHINGTON (Reuters) - The following are highlights from a House Financial Services Committee hearing on Thursday on financial regulatory reform with Federal Reserve Chairman Ben Bernanke.

BERNANKE ON UNEMPLOYMENT

"We have to grow faster than the underlying potential in order to make a dent in the unemployment rate. It depends on how quickly the economy grows... If it only grows at 3 percent, which is not much faster than the underlying potential growth rate, than unfortunately the unemployment rate would still probably be above 9 percent by the end of the year (2010.)"

BERNANKE ON WHY TREASURY SHOULD HEAD SYSTEMIC RISK COUNCIL

"Obviously because the Treasury has the broadest responsibility for the economy in general, has the broadest responsibility for any fiscal implications and financial implications and frankly because the Treasury would probably be better placed to mediate any differences among agencies that might arise for whatever reason."

BERNANKE ON INFLATION

"We are confident that we can manage our policies to support the economy without inducing inflation in the medium term.

"We fully believe we have the tools and political will necessary to achieve that."

BERNANKE ON INTERNATIONAL RESERVE CURRENCY

"It would weaken the dollar and we would have to watch for any inflationary consequences... I want to reiterate that I don't see this as a near-term risk, so long as we as a country take the appropriate steps to manage our fiscal position..."

BERNANKE ON EXECUTIVE COMPENSATION

"The Federal Reserve is about to issue guidance for comment on executive compensation which will apply not only to the top 5 or 10 executives, but way down into organization, traders or anybody whose activities would affect the risk profile of the company. We view this as a safety and soundness issue. That is what we have heard from the institutions themselves. They believe that the incentive structure affects safety and soundness."

BERNANKE ON RESOLUTION AUTHORITY

"One of the big concerns about these large firms... As too big to fail firms they are not subject to the discipline of the market because lenders do not believe that this firm will be allowed to fail. That has to be eliminated and fixed... I would not be satisfied with any resolution authority that did not have a strong presumption and a strong mechanism for allowing these firms, when being taken over by the government, to impose significant losses on not only shareholders but also creditors."

BERNANKE ON WHETHER HEDGE FUNDS WOULD BE DEEMED SYSTEMIC

"My view at this point is that I would not think any hedge fund or private equity fund would become a systemically critical firm individually. However it would be important for the systemic risk council to pay attention to the industry as a whole and make sure they understand what was going on so there wouldn't be some kind of broad-based problem that might cut across a lot of firms."

BERNANKE ON REFORM OF FANNIE MAE, FREDDIE MAC

"I think in the near future we need to have a plan for Fannie and Freddie...I think the GSEs do need to be addressed in the near term, not just for systemic risk reasons, but because there's a lot of uncertainty in housing and what's going to happen to the housing structure, housing finance system. So I hope that in the very near future, I believe that's the intention, I hope in the very near future we'll have some proposals on that."

BERNANKE ON COUNCIL OF REGULATORS

"We have never supported, and the administration has never supported, a situation in which the Fed would be some kind of untrammeled super-regulator over the entire system. That has never been contemplated. The original administration proposal proposes a council and we support the council. We think it has a very valuable role to play."

BERNANKE ON SUPERVISION, FROM PREPARED TEXT

"For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency. However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets--both regulated and unregulated--may exceed the capacity of any individual supervisor. Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole. This objective can be accomplished by modifying the regulatory architecture in two important ways.

"First, an oversight council--composed of representatives of the agencies and departments involved in the oversight of the financial sector--should be established to monitor and identify emerging systemic risks across the full range of financial institutions and markets...

"Second, the Congress should support a reorientation of individual agency mandates to include not only the responsibility to oversee the individual firms or markets within each agency's scope of authority, but also the responsibility to try to identify and respond to the risks those entities may pose, either individually or through their interactions with other firms or markets, to the financial system more broadly."

(Washington Newsroom 202-898-8310)