Bernanke opposes Lincoln derivatives "spin off" provision

Federal Reserve Chairman Ben Bernanke said a controversial derivatives provision in Wall Street overhaul legislation would "weaken" financial stability.

The provision, backed by Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.), would require banks to spin off their derivatives operations. Big banks, which earn billions of dollars in revenue on derivatives, are strongly opposed to the provision.

In a letter to senators, Bernanke said the provision would compromise new regulations.

"Forcing these activities out of insured depository institutions would weaken both financial stability and strong prudential regulation of derivative activities," Bernanke said.

"I am concerned section 716 [referring to the specific provision] in its present form would make the U.S. financial system less resilient and more susceptible to systemic risks and, thus, is inconsistent with the important goals of financial reform legislation."

Bernanke said the provision would force derivatives operations into less regulated operations or toward foreign firms.

Bernanke is the latest U.S. regulator to oppose the Lincoln provision. Federal Deposit Insurance Corporation (FDIC) chair Sheila Bair and Paul Volcker, White House adviser and former Fed chairman, have recently spoken out against the "spin off" provision.