Yesterday, Federal Reserve Chairman Ben Bernanke delivered his semi-annual monetary policy report to the Senate Committee on Banking, Housing, and Urban Affairs. Regarding the economy and possible changes to the Federal Reserve’s monetary policy initiatives, Chairman Bernanke largely reiterated statements he made the day before in testimony before the House Financial Services Committee. However, many of the questions posed to the Chairman at the hearing related to proposed financial services reform legislation.
Chairman Bernanke defended the Federal Reserve’s role as primary supervisor of bank holding companies, arguing that the Federal Reserve had unique ability to provide “strong, consolidated supervision” of “large, complex” bank holding companies that “pose a threat to the stability of the financial system.” He reiterated the Federal Reserve’s commitment to enhance bank holding company capital and liquidity requirements, adopt rules to ensure that executive compensation practices do not encourage excessive risk-taking, and continue the “surveillance program” that it initiated following last year’s stress tests. As he did a day earlier before the House Financial Services Committee, he expressed skepticism about the so-called Volcker rule, which would prohibit banks from also engaging in proprietary trading or from owning private equity and hedge funds, noting “the potential for unintended consequences.”
He did indicate some willingness to accept restrictions on the Federal Reserve’s exercise of its lender-of-last-resort powers under Section 13(3) of the Federal Reserve Act, but emphasized the importance of the Federal Reserve having the power, in “unusual and exigent circumstances,” to implement emergency lending programs. However, he also expressed a strong desire to avoid involving the Federal Reserve in the “wind-down of failing, systemically critical firms.”
The Chairman also stated that the Federal Reserve was “looking into a number of questions relating to Goldman Sachs and other companies related to their derivatives arrangements with Greece,” which have sparked controversy as the EU has imposed a March 16 deadline on the Greek government to lay out a plan to reduce its deficit. Bernanke noted that “using these instruments in a way that intentionally destabilizes a company or a country is counterproductive.”