Bernanke proposes Systemic Risk Authority
The US needs an overarching regulatory authority to prevent a repeat of risks building up unchecked across the financial system and exploding into economic crisis, Ben Bernanke said on Tuesday. He said the financial crisis, which had seen huge risks building up in lightly regulated institutions, had revealed the weakness of fragmented regulation.
“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” he said. “In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.”
Excerpts from his speech:
We should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing.
The consolidated supervisors must have clear authority to monitor and address safety and soundness concerns in all parts of the organization, not just the holding company.
How could macroprudential policies be better integrated into the regulatory and supervisory system? One way would be for the Congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system. The elements of such an authority's mission could include, for example,
(1) monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;
(2) assessing the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks;
(3) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms; and
(4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. Two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure that I discussed earlier.
Introducing a macroprudential approach to regulation would present a number of significant challenges. Most fundamentally, implementing a comprehensive systemic risk program would demand a great deal of the supervisory authority in terms of market and institutional knowledge, analytical sophistication, capacity to process large amounts of disparate information, and supervisory expertise.
Other challenges include defining the range of powers that a systemic risk authority would need to fulfill its mission and then integrating that authority into the currently decentralized system of financial regulation in the United States. On the one hand, it seems clear that any new systemic risk authority should rely on the information, assessments, and supervisory and regulatory programs of existing financial supervisors and regulators whenever possible. This approach would reduce the cost to both the private sector and the public sector and allow the systemic risk authority to leverage the expertise and knowledge of other supervisors. On the other hand, because the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient.
For example, a systemic risk authority would need broad authority to obtain information--through data collection and reports, or when necessary, examinations--from banks and key financial market participants, as well as from nonbank financial institutions that currently may not be subject to regular supervisory reporting requirements. A systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified systemic risks--in coordination with other supervisors, when possible, or independently, if necessary. The role of a systemic risk authority in setting standards for capital, liquidity, and risk-management practices for the financial sector also would need to be explored, given that these standards have both microprudential and macroprudential implications.