By Silla Brush - 10/01/09 06:54 PM EDT
Federal Reserve Chairman Ben Bernanke and leading congressional lawmakers on Thursday voiced strong support for a new council of federal regulators to monitor broad risks to the financial system.
Bernanke, in testimony before the House Financial Services Committee, urged Congress to empower the central bank to regulate firms posing a systemic financial risk. But he also supported a new oversight council, and said that keeping an eye on the whole financial system "may exceed the capacity of any individual supervisor."
Bernanke emphasized to lawmakers that all of the government’s financial regulators should be directed to watch for risks to the system.
The Federal Reserve has come under heavy criticism from Democrats and Republicans for lax supervision in the run-up to the crisis, and many lawmakers are reluctant to grant the central bank additional power to oversee the financial system.
The Obama administration proposed earlier this year that the Fed should oversee large firms for systemic risk, and that a new council should provide advice on the broader system. Critics have said the council proposal does not have enough enforcement power.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) is considering granting most of the new authorities to an oversight council instead of to the Fed. House Financial Services Committee Chairman Barney Frank (D-Mass.) has talked about setting up a system of shared authority over systemic risk.
“There were some, myself included, who earlier this year thought the Federal Reserve would have a larger role than it looks like it will have; that it will be part of a conciliar structure,” Frank said on Thursday.
Bernanke responded to lawmakers who sensed a shift in the Fed’s position on the issue by saying that the central bank never supported “some kind of untrammeled super-regulator over the entire system.”
But Bernanke said the Federal Reserve is "well-suited" to oversee systemically important firms because of its current responsibilities in regulating large and interconnected banks.
“For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency,” he said.
The financial industry has lobbied lawmakers on which firms would be designated as large or powerful enough to fall under the Fed’s proposed authorities. Bernanke appeared to begin drawing that line on Thursday, when he said he did not think any hedge fund or private equity fund would be systemically critical on its own. However, he said, a council of regulators would need to oversee those broader industries.
Bernanke also defended the Fed in his testimony, saying that the central bank has "already taken a number of important steps to improve its regulations and supervision of large financial groups."
Under the administration’s proposal, the Fed would lose its current consumer protection powers to a new Consumer Financial Protection Agency (CFPA). Frank recently released a "report card" finding that the Fed failed to exercise its consumer protection responsibilities before the crisis.