Posted on 24 Mar 2009
Federal Reserve Chairman Ben Bernanke and Treasure Timothy Geithner during Congressional testimony called for stronger regulation to constrain the risks taken by firms that could endanger the financial system. The remarks presage some of the likely changes to U.S. regulations in the aftermath of the worst crisis since the 1930s.
Bernanke said “AIG highlights the urgent need for new resolution procedures.”
The crisis may prompt the most sweeping overhaul of U.S. financial oversight since the Great Depression, with lawmakers such as committee chairman Barney Frank, a Massachusetts Democrat, calling for the Fed to be a systemic risk regulator.
Geithner also said the regulatory system must be fixed after it failed to rein in excesses at AIG.
“All institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking,” Geithner said. “Regulators must apply standards, not just to protect the soundness of individual institutions, but to protect the stability of the system as a whole.”
While the Federal Deposit Insurance Corp. has the power to take over failing deposit-taking firms and wind down their assets, no such authority exists for financial firms that aren’t classified as banks, such as AIG or a hedge fund with extensive links throughout the banking system.
“AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms,” and the need for consolidated supervision of “all systemically important financial firms,” Bernanke said.