By Steven K. Beckner

NEW YORK CITY (MNI) – Federal Reserve Chairman Ben Bernanke said
Wednesday evening that the Fed would handle disclosure of banks’
proprietary data very delicately.

Bernanke, answering questions following a conference sponsored by
the Squam Lake Group of academic economists and former policymakers,
said Section 8 of the Senate financial regulatory reform bill would give
the Fed flexibility to, among other things, adjust margin requirements
in pursuit of financial stability.

Bernanke said the Fed is near issuing final rules on executive
compensation that would be designed to keep financial firms from
incentivizing “excessive risk-taking.”

The Fed chief also said that reinstating the old Glass-Steagall
separation between commercial and investment banking would not be
“constructive” and is “not on the agenda.”

Disclosure has been one of the centerpieces of regulatory reform,
and Bernanke addressed the issue in his earlier prepared remarks.

“A regulatory requirement to track and report timely, consistent,
and fully aggregated data on risk exposures could also promote better
risk management by the firms themselves,” he said. “And increased public
disclosure of such data would provide investors and analysts with a more
complete picture of individual firms’ strengths and vulnerabilities, as
well as of potential risks to the system as a whole, thereby
facilitating more effective market discipline.”

“Consistent with this recommendation, and in preparation for
possible changes in the regulatory framework, the Federal Reserve is
expanding its already-extensive commitment to the collection and
analysis of financial data,” he continued. “For example, efforts are
under way to construct better measures of counterparty credit risk and
interconnectedness among systemically critical firms.”

“In particular, to better identify potential channels of financial
contagion, supervisors are working to improve their understanding of
banks’ largest exposures to other banks, nonbank financial institutions,
and corporate borrowers,” he went on. “We are also collecting data on
banks’ trading and securitization exposures, as well as their liquidity
risks, as part of an internationally coordinated effort to improve
regulatory standards in these areas.”

But when asked about the possibility that releasing information
about weaker financial firms might cause bank runs and the like,
Bernanke indicated that caution would need to be used.

“Disclosure is a complicated matter for that reason,” he replied.
“If we want full cooperation it helps for them to believe their
proprietary information will not be released to their competitors.”

But Bernanke said the Fed’s experience with bank stress tests, in
which information about major banks’ capital position was made public,
showed the usefulness of disclosure. He called that process “a critical
step in the stabilization of the banking system.”

“It allowed for an increase in confidence” and “allowed them to
raise $75 billion in new capital.”

“Going forward, we will have lots of routine supervision,” said
Bernanke but the Fed will not “release all information on a daily

He said “appropriate disclosure can be confidence inducing rather
than destabilizing.”

Asked whether the Fed, as chief “systemic regulator,” might resort
to changing margin requirements to help stabilize the financial system,
Bernanke said Section 8 of the Senate bill gives the Fed authority in
the area of “key infrastructure and financial utilities.” And he added,
it gives the Fed and other regulators “quite a bit of flexibility … to
promote financial stability.”

He said it gives the Fed “some ability to address margin changes
and other prudential aspects of utilities.”

Calling the proposed legislation “certainly comprehensive,” he said
that, “We’ll have to see how the bill is completed.”

“Beyond that, it’s going to take some experience and practice …
for market and regulators … to see if” it meets the needs that “led to
legislation in the first place.”

Bernanke said the Fed “will soon provide final rules” on executive
compensation which “will be part of the supervisory process for the
future to ensure that large financial institutions and all financial
institutions take into account the incentive effects of their
compensation programs.”

He said “the proposed rulemaking for comment would not address the
level of compensation, but the structure of compensation.” The
regulators would then “evaluate the structure of compensation” to make
sure it is “structured in a way to create long-term incentives, not
excessive risk-taking.”

Bank boards and risk officers would be expected to “be aware of
those incentives and factor them into the risks facing the firm.”

During the 1930s, commercial and investment banking was divided by
the Glass-Steagall Act to end supposed “conflicts of interest,” but
Bernanke cited research showing that conflicts of interest were not a
major cause of the Great Depression. |

One audience member asked whether it would be desirable to bring
back Glass-Steagall type restrictions.

Bernanke observed that, in the financial crisis commercial banks
and investment banks got in serious problems, but “it’s not clear the
interaction of the two created serious problems.”

“It’s not clear it would be particularly constructive” to revive
Glass-Steagall, he said.

** Market News International **

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