By Yali N’Diaye

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Thursday
said while the central bank would certainly pay attention to risks
arising from U.S. states fiscal woes, the Financial Stability Oversight
Council would be better positioned to identify whether developments in
the muni sector are a source of systemic risk.

Asked during a hearing on the Dodd-Frank implementation whether the
Fed would look at U.S. states as a source of systemic risk, Bernanke
replied, “Our office of financial stability is a small office, which is
trying to look at different risks that might emerge,” but which has no
examination authority, for instance.

“The risks arising from states or the municipal market would be
something that the Federal Reserve would pay attention to,” Bernanke
told lawmakers.

However, “I think probably the appropriate venue for that would be
the FSOC,” he said, since the different regulators could in that context
discuss “the complications or ramifications of developments” in the muni
sector.

A lawmaker expressed concerns about states’ fiscal and debt
situations — such as Illinois or California — which could be the
source of a systemic risk.

Bernanke was also asked whether he considered China’s reduction of
U.S. Treasuries holdings as a source of systemic risk.

“The international imbalances, the current account imbalances” in
reserve accumulations could “in principle,” Bernanke said, “be a
systemic risk” and did in fact contribute to a crisis.

That said, he continued, “I wouldn’t make much” of the Treasury
International Capital System data, he said, as those are “incomplete.”

Besides, Bernanke said, “in the short run, the main determinant of
Chinese accumulation of dollars is their need to keep the renminbi
pegged at the level that they choose.”

So they “take whatever they need to take to keep their currency at
the desired level.”

In other remarks, Bernanke said the Fed is doing its best to
minimize the burden that regulations would impose on smaller banks.

Regulators were also asked about the standards they are currently
developing for qualifying residential mortgages that will be exempt from
risk retention in a securitization

Federal Deposit Insurance Corporation Chairman Sheila Bair
indicated that the QRM rule would focus on issuers of securitization,
“not small mortgage originators.”

“So I think the impact will not be burdensome for community banks,”
she said. So “if you are concerned about that,” she told lawmakers, “you
will be pleased.”

Small and community banks were the subject of several concerns
during the hearing, as lawmakers stress the regulations could become an
excessive burden for those institutions.

One of the concerns was the that Fed’s proposed regulation about
reduction of debit card interchange fees — fees that retailers agree to
pay for accepting debit card payments — might play to the disadvantage
of small banks if not consumers.

Bair took the opportunity to oppose the Fed’s approach, saying her
agency would comment on the proposed rule.

** Market News International Washington Bureau: 202-371-2121 **

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