The Fed opposes legislation seeking to audit the central bank's monetary policy
WASHINGTON (MarketWatch) - Federal Reserve Chairman Ben Bernanke on Friday said that he expects that roughly 25 financial firms would be considered systemically significant as part of legislation giving the central bank authority to oversee large, interconnected, financial firms whose collapse could cause collateral damage to the markets.
Bernanke told lawmakers at a House Financial Services Committee hearing about bank regulatory restructuring that "virtually all of those firms" are already organized as bank holding companies, which already gives the Fed supervisory and lender of last resort authority to these institutions.
After Lehman Brothers collapsed last year, many large investment banks either registered with the Fed as bank holding companies or were acquired by retail banks that already fell under the central bank's supervision.
"I would not envision the Fed's oversight going beyond many more firms than those already registered as bank holding companies," Bernanke told lawmakers. Treasury Secretary Timothy Geithner also testified at the hearing, followed by other key regulators.
However, some large insurance companies, hedge funds and buyout shops are not registered with the Fed but could be considered systemically significant if legislation giving the central bank new authorities is approved.
Legislators could decide to grant the Fed and Treasury the authority to identify how many financial institutions are considered systemically significant, as a White House proposal recommends. However, lawmakers could imbue a council of regulators with the authority to make that determination.
In any case, GOP lawmakers took issue with the proposition that any institution could be designated as systemically significant; arguing that it would make observers believe the institution was too-big-to-fail.
Rep. Jeb Hensarling, R-Texas, argued that whatever institutions would be designated as systemically significant would "send a signal to the market that they can always receive taxpayer bailouts to keep themselves afloat." He added that "we are creating a perpetual bailout nation."
However, Bernanke argued that a process envisioned in the White House regulatory reform proposal creating a process for unwinding large mega-institutions would eliminate the perception that a large systemically significant firm is too-big-to-fail.
The White House proposal would establish a process to resolve large insolvent systemically significant financial institutions in a way that their collapse does not cause collateral damage to the financial markets.
The goal would be to pay off counterparties of an insolvent institution to deter any such damage arising in the markets. The proposal said the mechanism would be modeled after the Federal Deposit Insurance Corp.'s approach to dismantling insolvent smaller banks, but it would be for larger systemically significant financial institutions.
"Creation of a mechanism for the orderly resolution of systemically important non-bank financial firms, should help remediate this problem," Bernanke said.
Bernanke opposes audit of Fed monetary policy
Bernanke also said he opposed legislation moving on Capitol Hill that would allow the Government Accountability Office, the investigative arm of Congress, to audit the central bank's monetary policy goals.
"We are more than happy to work with the GAO and open to giving them broad authority to look at various aspects of our operations, including our responses to the financial crisis, but we are worried that an audit of monetary policy would result in a reduction of the independence of the Fed," Bernanke said.
Two pieces of legislation in the House and one in the Senate would compel the GAO to conduct a monetary-policy audit at the Fed and issue a report. One GAO audit bill, introduced by Rep. Ron Paul, R-Texas, has 245 co-sponsors, and would require an audit of every aspect of the Fed, including its interest rate policy as well as its wide-variety of programs responding to the financial crisis such as its lender of last resort authority.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
By Ronald D. Orol, MarketWatch
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