WASHINGTON Bank regulators may rethink their crackdown on derivatives if a global agreement cannot be reached on margin requirements, Federal Reserve Chairman Ben Bernanke said on Thursday.
Bernanke told a Senate Banking Committee hearing that U.S. banks could be at a "significant competitive disadvantage" if their foreign rivals do not have to demand margin, or collateral, for derivatives trades.
Policymakers are creating a global framework to regulate the roughly $600 trillion derivatives market that was blamed for contributing to the 2007-2008 financial crisis.
Derivatives can be used by investors to make big bets on the direction of interest rates and other changes in financial conditions. They are also used to offset business risks, such as exchange rate fluctuations and commodity price movements.
"Our first choice is to equalize the playing field," Bernanke said at the hearing on the one-year anniversary of the Dodd-Frank financial oversight law.
"If that doesn't happen, we will have to think again about how to meet Dodd-Frank's requirements for improved prudential safety, which is what margins are intended to achieve, without disadvantaging our banks."
Bernanke's comments addressed concerns held by the financial sector and lawmakers on both sides of the aisle who fear that strict derivatives rules could harm U.S. capital markets, absent a global deal.
The U.S. over-the-counter derivatives, or swaps, market is dominated by a handful of dealers including JPMorgan Chase and Goldman Sachs.
The New York congressional delegation, including Democratic Senator Charles Schumer, wrote in May to regulators saying U.S. regulations much be comparable with international ones, or else U.S. banks will lose business.
Bernanke was joined by other top financial watchdogs at the Dodd-Frank anniversary hearing.
The regulators said they are moving fast enough to give markets certainty, but slow enough to get hundreds of new rules right.
The session was a partisan display, with Republicans portraying Dodd-Frank as big government harming the economic recovery, and Democrats arguing it was necessary medicine for a broken financial system.
"It has turned the financial regulatory landscape into a nightmare," said Senator Richard Shelby, the committee's top Republican.
Democratic Representative Barney Frank, co-author of the law, was the first witness at the hearing and attacked Republicans for starving regulators of the bigger budgets needed to carry out the new rules.
"This nickel and diming of the SEC and CFTC I think does grave harm," Frank said of efforts to restrict money for the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Regulators, for their part, said they are doing everything they can to keep pace.
A handful of regulatory agencies are writing hundreds of new rules to police the swaps market, reduce risk at the biggest financial firms, and bring the so-called shadow banking system -- which includes hedge funds and non-traditional lenders -- into the traditional regulatory framework.
"While some feel we are moving too quickly and others feel we are not moving rapidly enough, I believe we are proceeding at a pace that ensures we get the rules right," SEC Chairman Mary Schapiro said.
The SEC and CFTC have struggled to keep pace with the swift rulewriting timeline laid out in Dodd-Frank, and are months behind schedule on many key rules.
THE TOO BIG TO FAIL CHALLENGE
Bernanke said regulators still have a ways to go before Dodd-Frank reforms work.
He said markets do not yet believe the government will refrain from rescuing a failing financial firm.
Dodd-Frank addresses this "too big to fail" problem by tightening capital requirements and supervision of the largest financial firms. It also creates an "orderly liquidation authority" so the government can take down a failing financial giant without sparking chaos in the markets.
Bernanke said regulators will know they have chipped away at "too big to fail" when firms start shrinking to avoid stricter oversight, and when big firms' funding costs go up because the perception of a government backstop diminishes.
"We're not there yet. I think we absolutely must get there," Bernanke said.
(Reporting by Sarah N. Lynch and Dave Clarke, with additional reporting by David Lawder, Pedro Nicolaci da Costa; writing by Karey Wutkowski; Editing by Tim Dobbyn)