Special Access:With the Central Banker

Ben Bernanke,Chairman of the Federal Reserve,testified before the House Financial Services Committee last week,strongly defending the Fed's role in supervising the largest financial institutions.He also reflected on the current economic situation,including inflation and the structural deficit.We're not expecting inflation to rise in the near or medium term,Mr.Bernanke said.Employers are seeing slow wage growth and strong productivity gains.Unit labor costs are falling and there is weak demand,discouraging price increases.It's conceivable long term debt could directly or indirectly affect the economy by causing a loss of confidence.
The Federal Reserve still retains 1.25 trillion dollars of mortgage-backed securities.We think our holding them will keep mortgage rates down,even though we are ending new purchases.The very high vacancy rates in rental properties are keeping rents down.
Stripping the Fed of supervisory authority,in light of the recent crisis,would be a grave mistake.Large institutions need to be seen as a whole,the wide range of activites of a complex international financial firm.The Fed has a range of multidisciplinary skills for consolidated oversight.The Fed is the one institution with the full breadth of skills.The Fed of course made errors,but we were hardly alone in that respect.
We've learned that regulations need to be tougher;we have changed our approach to one of tougher risk assessment.We've increased capital requirements and scrutiny of executive compensation.You have to be careful not to restrict hedging activity,which involves securities purchases.We would implement regulations as part of our overall risk assessment of the company,whether the company has adequate management capabilities to manage those risks.A lack of strong controls would be grounds for the supervisor to require changes or elimination of those activities.If you can get market discipline to bear on firms,that would help the regulators,Mr.Bernanke told the committee.
Ben Bernanke was recently reappointed and confirmed for another four-year term as Chairman,despite distrust of the Fed by some members of Congress.Congress feared disrupting financial markets by denying his reappointment,among other considerations.

Managing Systemic Risk

A critical part of risk management is understanding the linkage between incentives and risk-taking,Ben Bernanke believes.The structure of compensation is a safety and soundness issue.Our supervisors are emphasizing that maintaining risk management is equally important in good times and bad.The Federal Reserve is the consolidated supervisor of bank holding companies.We are working to bolster the ability of the financial system overall to withstand shocks,creating increasingly stringent standards and targets for market participants.We must be sure we continually increase our expertise,to match it with the situation.A macro-prudential agenda has many elements.Precisely how best to implement this agenda remains open to debate.An approach to supervision that focuses narrowly on individual institutions can miss threats to the financial system,in Chairman Bernanke's view.

Banking Supervision Examined

Ben Bernanke,Chairman of the Federal Reserve,has been reflecting on banking supervision in light of the financial crisis.There are two questions,Mr.Bernanke said:1.What have we learned? and 2.How can we apply those lessons? Increasing the effectiveness of supervision must be a top priority of our institution.The Federal Reserve is now requiring banks to identify the unintended consequences of new financial instruments.We coordinate closely with foreign supervisors,Mr.Bernanke revealed.Our close relationships have proved very helpful as we have dealt with this crisis.The crisis underscores the importance of liquidity in banks.International collaboration has enabled U.S. supervisors to learn from the experience,Mr.Bernanke pointed out.