WASHINGTON (Reuters) - The following are highlights from Federal Reserve Chairman Ben Bernanke’s testimony on Thursday to the Financial Crisis Inquiry Commission on the problem of financial institutions that are “too big too fail.”
BERNANKE ON LEHMAN’S LACK OF CAPITAL
“The unanimous opinion that I was told and I heard from both the lawyers and from the leadership of the Federal Reserve Bank of New York was that Lehman did not have sufficient collateral to borrow enough to save itself, and therefore any attempt to lend to Lehman within the law would be futile and would only result in loss of cash.”
BERNANKE ON LESSONS LEARNED FROM CRISIS
“The most important lesson of the crisis is to end too big to fail. I believe that in a much different way than we did before the crisis, we now have the tools to address that.
“In particular tougher regulation and oversight will reduce the risks. The existence of a resolution regime will increase market discipline because creditors will know they can lose money.
Strengthening the resilience of the financial system itself will reduce the incentive of the government to intervene in these situations.”
BERNANKE ON PRESSURES ON FIRMS TO DOWNSIZE
“My projection is that even without direct intervention by the government, that over time we’re going to see some break up and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures and by regulatory pressures as well.”
FROM PREPARED TEXT:
BERNANKE ON TOO BIG TO FAIL
“If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved. Simple declarations that the government will not assist firms in the future, or restrictions that make providing assistance more difficult, will not be credible on their own.
Few governments will accept devastating economic costs if a rescue can be conducted at a lesser cost; even if one administration refrained from rescuing a large, complex firm, market participants would believe that others might not refrain in the future.
Thus, a promise not to intervene in and of itself will not solve the problem.
“The new financial reform law and current negotiations on new Basel capital and liquidity regulations have together set into motion a three-part strategy to address too-big-to-fail.”
BERNANKE ON USING MONETARY POLICY AGAINST ASSET BUBBLES
“Generally, financial regulation and supervision, rather than monetary policy, provide more-targeted tools for addressing credit-related problems. Enhancing financial stability through regulation and supervision leaves monetary policy free to focus on stability in growth and inflation, for which it is better suited.
We should not categorically rule out using monetary policy to address financial imbalances, given the damage that they can cause; the FOMC is closely monitoring financial conditions for signs of such imbalances and will continue to do so. However, whenever possible, supervision and regulation should be the first line of defense against potential threats to financial stability.”
BERNANKE ON REGULATORY IMPROVEMENTS
“To facilitate swifter, more-effective supervisory responses, we have increased the degree of centralization of the oversight and control of our supervisory function, with shared accountability by senior Board and Reserve Bank supervisory staff and active oversight by the Board of Governors.
Supervisory concerns will be communicated to firms promptly and at a high level, with more-frequent involvement of senior bank managers and boards of directors and senior Federal Reserve officials.
Where necessary, we will increase the use of formal and informal enforcement actions to ensure prompt and effective remediation of serious issues.”
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