Bernanke's speech to FDIC forum

WASHINGTON (Reuters) - Following is the full text of Federal Reserve Chairman Ben Bernanke's "Financial Regulation and Financial Stability" speech issued in Washington Tuesday and delivered before a Federal Deposit Insurance Corp. forum in Arlington, Va.: "I would like to thank Chairman Bair for inviting me to address this conference on mortgage lending to low- and moderate-income households. The decision to own a home is one of the most important decisions that families make. Whether owning a home is the right choice for a particular individual (or family) depends on many factors specific to the individual. However, for those who are willing and financially prepared to undertake homeownership, we look to our financial system to provide access to mortgage credit in ways appropriately tailored to each borrower's needs. Unfortunately, in the past few years, many mortgage loans were extended that were poorly underwritten or whose terms were inadequately disclosed, particularly in the subprime market. As you know, those poor lending practices have contributed to a sharp increase in mortgage delinquencies and foreclosures. The resulting costs have been felt not only by borrowers but also by entire communities, as foreclosure clusters have caused neighborhoods to deteriorate and reduced municipal tax bases. The decline in the national housing market, which has been a major cause of the broader slowdown in economic activity, was in turn greatly exacerbated by the collapse of subprime lending. And financial institutions have suffered large losses, with implications for the cost and availability of new credit. The recent experience, including the broader turmoil we have seen in the financial markets, will have--indeed, is already having--important consequences for U.S. regulatory policy. First, regulators are taking action to strengthen consumer protections. Next week, the Federal Reserve Board will issue new rules on mortgage lending, using its authorities under the Home Ownership and Equity Protection Act. These new rules, which will apply to all lenders and not just banks, will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending. We received many helpful comments on our proposal and we incorporated a number of them into the final rules. In another effort to protect consumers, the Board has also recently issued proposals to substantially improve credit card disclosures and to address a number of unfair or deceptive acts and practices in credit card lending. Second, regulatory policy can help to ensure that mortgage credit is available to qualified borrowers, including those of low and moderate incomes. In particular, I welcome recent efforts to improve the regulatory oversight of the government-sponsored enterprises, Fannie Mae and Freddie Mac. If these firms are strong, well-regulated, well-capitalized, and focused on their mission, they will be better able to serve their function of increasing access to mortgage credit, without posing undue risks to the financial system or the taxpayer. Policymakers are also discussing the modernization of the Federal Housing Administration and the expansion of the products and programs it might offer to make mortgage credit available and to help prevent avoidable foreclosures. Third, instability in our financial system over the past year or so has importantly affected the availability and terms of credit and the pace of economic growth. Thus, beyond actions focused on mortgage markets, regulators must consider what can be done to make the U.S. financial system itself more stable, without compromising the dynamism and innovation that has been its hallmark. Several bodies, including the President's Working Group (PWG) in the United States and the international Financial Stability Forum, have recently issued comprehensive reports on the lessons of the financial turmoil with recommendations for regulators and the private sector. Many of these recommendations are being implemented, including more stringent regulation of mortgage lending (recommended by the PWG), strengthening of regulatory capital and liquidity management requirements for banks, reforms of the credit rating agencies, and others. The Federal Reserve has been actively involved in developing and implementing these necessary reforms. In the remainder of my remarks, I would like to discuss this more general issue of promoting financial stability, including some of the lessons learned, what the Federal Reserve is already doing, and how we as a society might wish to go about strengthening our financial system for the future. The Bear Stearns Episode and Its Implications As you are aware, one of the key events in financial markets in recent months was the near-bankruptcy in March of the investment bank Bear Stearns. The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Hence, they refused to renew their loans and demanded repayment. Bear Stearns's contingency planning had not envisioned a sudden loss of access to secured funding, so it did not have adequate liquidity to meet those demands for repayment. If a sale of the firm could not have been arranged, it would have filed for bankruptcy. Our analyses persuaded us and our colleagues at the Securities and Exchange Commission (SEC) and the Treasury that allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy. In particular, Bear Stearns' failure under those circumstances would have seriously disrupted certain key secured funding markets and derivatives markets and possibly would have led to runs on other financial firms. To protect the financial system and the economy, the Federal Reserve facilitated the acquisition of Bear Stearns by the commercial bank JPMorgan Chase.