By Sheila Mullan

NEW YORK (MNI) – Federal Reserve Board Chairman Ben Bernanke Friday
noted that there is still a need to watch potential problems from the
shadow banking system and to take such potential problems “seriously.”

Bernanke answered questions after a speech at a conference on
“Rethinking Finance” hosted by the Russell Sage Foundation and the
Century Foundation. Bernanke’s prepared remarks were titled
“Some Reflections on the Crisis and the Policy Response” and did not
deal with current economic conditions or monetary policy.

Bernanke was asked what would the Fed do if it had to combat
another asset price bubble. “Fighting an asset price bubble means bank
stress tests, to see if banks’ current portfolios” do OK under
normal circumstances “as well as how they would do under severe
scenarios,” he added.

He noted that the “ability of banks” to move financial
instruments off their balance sheet has been addressed in good measure
by the FASB rules but also added that the Fed “can’t be complacent” as
there are “still issues” posed by triparty repo and other parts
of the financial system.

Bernanke noted that he is taking the shadow banking’s potential
problems “seriously” and added that he wants to spot the
“vulnerabilities of the system.” The Fed is “keeping
its eyes closely on it,” he said.

He also added that the Fed has made a good bit of progress on
“some” shadow banking issues, and will designate some shadow
institutions as Systemically Important Financial Institutions (SIFIs).

Bernanke also noted that the Fed is looking at macro-economic
counter-cyclical tools, but has made no decisions. He noted that some
Asian countries and the United Kingdom also have been studying such
ideas.

“The U.S. is not at the point of taking a macro counter-cyclical
tool but is studying the idea,” he said.

Bernanke also noted that the cause of the housing bubble
was a “hotly contested topic” but evidence that monetary policy
triggered the bubble is “quite weak.”

Bernanke also noted the Fed has to make sure that the financial
system can withstand a major shock. He said that financial stability now
is an “equal partner” with monetary policy.

Bernanke also added that the zero lower bound of rates has created
additional complexity for monetary policy.

— Sheila Mullan smullan@marketnews.com 212-669-6432

** MNI New York Newsroom: 212-669-6430 **

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