–Geithner:Important To Put Constraints On Risk Taking Before Pre-Crisis

By Ian Mckendry and Brai Odion-Esene

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Tuesday
called the issue of “too-big-to fail” financial institutions a major
concern and said he wants regulators to have the power to wind-down
large firms before they fail and cause considerable harm to the
financial system.

“I want the firm to die but I want to be able to break it up and
sell off pieces,” Bernanke told members of the House Financial Services
Committee during a hearing on events surrounding the failure of Lehman
Brothers.

On the question of legislation in the bill as passed by the House
authorizing regulators to break organizations considered too big to
fail, Bernanke said, “I think it’s something on the whole constructive,
and I’m certainly as a regulator willing to work within it’s dictates.”

U.S. Treasury Secretary Timothy Geithner — appearing alongside
Bernanke and the SEC’s Mary Schapiro — said the best way to deal with
the issue of too-big-to fail is to make sure regulators are equiped with
the authority to put effective constraints on risk-taking ahead of a
crisis.

Bernanke agreed on the importance of action to limit risks prior to
a crisis, particularly to protect public funds.

“Prior to the crisis you want to take actions necessary to limit
risks, and I’m very sympathetic to the view that through capital,
through restrictions on activities through liquidity requirements,
through executive compensations, through all variety of mechanisms, it’s
important that you limit risk taking especially when the losses are
effectively taken by the tax payer,” he said.

Geithner said setting margin and capital requirements were the
“right way to deal with preemptively” but said the U.S system cannot
rest entirely on the wisdom of regulators to act with “perfect
foresight” to defuse pockets of risk and leverage.

“It is not possible,” he said.

Congress needs to grant regulators oversight of institutions that
pose systemic risk, he said, and must ensure the financial system can
handle failures in future without substantial damage to the broader
economy.

“The only way I’m aware of to design a more stable system is to use
capital requirements,” Geithner said, “that is the centerpiece of the
reforms this Committee embraced.”

He argued that to be able to do that on a consolidated basis to an
institution that poses a systemic risk “is the essential necessary
reform that we all have to support.”

Geithner also used the opportunity to take issue with Republican
claims that the House bill grants bailout authority to the government,
saying it will not give the government power to put capital in failed
institutions.

House Financial Services Chairman Barney Frank supported Geithner’s
assertions, described Republican accusations as “flatly wrong.” It is
the job of Congress to give regulators the tools to prevent a future
failure of the magnitude of Lehman happening again, he said.

“This is a blatant mischaracterization that we are trying to put
capital into these companies,” Frank said, “The bill that we have as the
secretary made it clear, is very explicit. No money can be spent in
these cases until the institution is out of business.”

Geithner, however, could not estimate when asked how much money
would actually be needed to wind-down and break up a too-big-to fail
institution.

“It’s an unanswerable question how much money you might need, you
cannot know in advance how much,” he said.

Other methods to prevent a future crisis, would be to stress tests
of banks’ capital positions, Geithner said, which would increase
transparency. Making the stress tests public would let the market know
“whose is strong, and who is not,” and allow regulators to force banks
to hold more capital.

Bernanke agreed that the 2009 stress tests of the largest U.S.
banks where “extremely helpful,” and the Fed already uses these tests on
a regular basis to evaluate bank capital positions.

Making the result of the results of the stress tests public is
“certainly worth looking at,” Bernanke said.

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

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