Earlier today, at the Federal Reserve Bank of Chicago Conference on Bank Structure and Competition, Ben Bernanke, Chairman of the Federal Reserve Board, gave a speech on lessons banking supervisors have learned from the current financial crisis. During the speech, Chairman Bernanke outlined the steps taken to strengthen capital, liquidity and risk management in the banking sector and described what lessons the Federal Reserve has learned about the “benefits of a more macroprudential orientation to financial oversight.” With respect to this latter point, the Chairman stated that he believes that this approach “supplements the supervision of individual institutions to address risks to the financial system as a whole….” Although the best way to implement this macroprudential approach remains open to debate, Chairman Bernanke indicated that its elements should include:

  • monitoring large or rapidly increasing exposures, e.g., subprime mortgages, across firms and markets, rather than just for an individual firm or sector;
  • assessing potential systemic risks of changing risk-management practices, broad increases in financial leverage, or changes in financial markets or products;
  • analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms;
  • ensuring that each systemically important firm receives oversight commensurate with the risks posed to the financial system;
  • providing a resolution mechanism to safely wind down failing, systemically important institutions;
  • ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;
  • working to mitigate pro-cyclical features of capital regulation and other rules and standards; and
  • identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole.