Bernanke backs financial reform, says Fed is moving forward

Ahead of Congressional action, the Federal Reserve is tightening capital and liquidity rules and aiming to change compensation structures to cut down on risk taking, the central bank's chief said Thursday. 

While the Fed backs closing gaps in the regulatory framework, the central bank is "not waiting to implement improvements that can be accomplished within our existing authority," Fed Chairman Ben Bernanke said during the 46th Annual Conference on Bank Structure and Competition at the Federal Reserve Bank of Chicago. 

Supervision of the largest, most complex financial institutions also has been strengthened. 

The financial taught Fed officials that there needs to be an overarching, multidisciplinary approach and perspective while monitoring financial firms and instruments and markets.

"In its evolving supervisory approach, the Federal Reserve is bringing together the skills of economists, financial market specialists, payment system experts, and others, with those of bank examiners to get the widest possible perspective on financial developments," Bernanke said. 

Meanwhile, the new framework should include enhanced consolidated supervision of bank holding companies and similar oversight for systemically important nonbank financial firms. 

Bernanke also advocated for a "strong resolution framework that allows policymakers to wind down failing firms and others important to the financial system without a "destabilizing bankruptcy and without a taxpayer bailout."

On Wednesday, the Senate easily approved an amendment offered by Senate Banking Chairman Chris Dodd (D-Conn.) and top Banking Republican Richard Shelby (Ala.) that essentially ends 'too big to fail' and eliminates loopholes used by regulators. 

The Fed is moving ahead with issuing proposed guidance to help ensure that compensation structures at banking organizations do not encourage excessive risk-taking, he said. In addition, the central bank is leading cooperative efforts by market participants and regulators to strengthen the infrastructure of key markets, including securities repurchase agreements and credit derivatives and other over-the-counter derivative instruments, Bernanke said. 

Senators are trying to work out OTC derivatives language for the financial reform measure. Senate Agriculture Chairwoman Blanche Lincoln (D-Ark.) has a proposal to regulate the markets and leading Republican Sen. Saxby Chambliss (R-Ga.) has offered an alternative for consideration.