This afternoon, Federal Reserve Chairman Ben Bernanke testified in a hearing before the House Committee on Financial Services on the Federal Reserve Bank’s efforts to provide liquidity during the current financial crisis.
The primary focus of the hearing was on the central bank's exercise of its expansive power to intercede in economic matters. Under Section 13(3) of the Federal Reserve Act, the Federal Reserve can, “in unusual and exigent circumstances,” authorize lending to individuals and entities unable to obtain “adequate credit.” Committee Chairman Barney Frank (D-MA) opined that the power has been “very responsibly wielded,” but questioned whether the concentration of power in the Federal Reserve with “very few restrictions” is appropriate. Chairman Bernanke claimed the use of emergency powers was justified to counteract systemic risk and support “the health of the overall economy.” He also urged that a “robust resolution regime” be a top priority for lawmakers.
Ranking Member Spencer Bachus (R-AL) centered his remarks on the need for more transparency in the Federal Reserve’s decision-making. He was particularly concerned with the Federal Reserve’s agreements and transactions with individual companies. Chairman Bernanke defended the terms of existing agreements, stating that most will bring a profit to the central bank, and that they are entered into hesitantly. However, Chairman Bernanke discouraged any suggestion that the identities of banks receiving emergency overnight loans be publicly disclosed, fearing such a move would “destroy the program” by discouraging bank participation.
On the issue of transparency more broadly, Chairman Bernanke signaled that the Federal Reserve has begun a “thorough review” of disclosure policies and the “effectiveness” of its communication. The review panel will be led by Federal Reserve Vice Chairman Donald Kohn. “Nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality,” argued Bernanke. He also announced that the Federal Reserve is developing a website for use by the general public which will provide information and analysis about Reserve Bank lending efforts. The website should be active in the next several weeks.
Prompted by questions from Chairman Frank, Chairman Bernanke also attempted to assuage any fears about the amount of risk borne by the Federal Reserve in connection with its efforts to provide prevent failures of financial institutions. Bernanke stated that the amount represented by such efforts totaled approximately five-percent of the Federal Reserve’s balance sheet. The remaining ninety-five-percent is “safe and overcollateralized,” he claimed.
The House Committee on Financial Services is scheduled to continue its series of discussions tomorrow with a hearing on TARP accountability.