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Bernanke Urges a Systemic Oversight Council to Monitor Risk

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Federal Reserve chairman Ben Bernanke called for the creation of a “systemic oversight council” to monitor and address risks inherent in the complex US financial system. “Because of the size, diversity, and complexity of our financial system, that task may exceed the capacity of any individual supervisor,” Bernanke said during a speech at the Federal Reserve Bank of Boston’s 54th Economic Conference. The council could be responsible for monitoring risk exposures that emerge from both firms and markets, identifying regulatory gaps, organizing responses to emerging risks and highlighting systemically important firms. The council would report to Congress and the public on detected risks and the proper response, Bernanke said. Not just the Federal Reserve but all financial supervisors and regulators should take account of threats to the broader financial system as part of their normal responsibilities, Bernanke said. Bernanke cited the problem of financial institutions deemed “too big to fail.” He urged Congress to close the gap between large complex financial firms, which pose risks to the overall system without owning a bank, and their lack of comprehensive oversight. “Large financial institutions manage their businesses in an integrated manner with little regard for the corporate or national boundaries that define the jurisdictions of functional supervisors in the United States and abroad,” Bernanke sad. He pointed to nonbank subsidiaries of financial holding companies that originate a mortgage loan and sell it to an investment bank for its packaging and distribution as a security. That security is then purchased by an investment vehicle supported by a bank affiliate’s liquidity facility, Bernanke said. Setting up such a council to identify and monitor risks these complex structures pose to financial stability would reduce the probability of a future crisis but only by the Congress’ efforts. “Regulators and supervisors can do a great deal, but comprehensive financial reform requires action by the Congress,” Bernanke said. Write to Jon Prior.

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