–Central Clearing Party To Provide Transparency
–Future Bank Stress Tests, Graded, Not Aimed To Hurt Smaller Banks
By Alyce Andres-Frantz
CHICAGO, May 5 (MNI) – Federal Reserve Chairman Ben Bernanke
Thursday said pending financial reform under proposed Dodd-Frank
legislation looks to strengthen the banking system and add transparency
through a central clearing party.
Bernanke gave a keynote address on ‘Implementing Dodd-Frank,
Progress to Date and Recommendations for the Future,’ to approximately
350 attendees at the Chicago Fed’s 47th Bank Structure & Competition
Conference.
In a question and answer session with the audience, Bernanke said
macro-prudential regulation being considered by Dodd-Frank should be
both organic and dynamic.
Additionally, Bernanke told the audience that pending regulation
requires that the future banking system be strong, resilient and able to
absorb shocks. Bernanke noted that legislation in Dodd-Frank proposes to
strengthen oversight, increase capital requirements and strengthen
financial market utilities.
He opined that if proposed legislation were in place a few
years ago, many of the issues that emerged and essentially “fell in the
cracks, would have come across the radar screen earlier.”
Dodd-Frank does make a lot of progress towards shadow banking
system, Bernanke said, noting that problems with risk, underwriting, off
balance sheet items and credit agency reform have been identified and
addressed. However, he also noted those problems were “the last war,
another war may come from another source.”
Bernanke also told the audience that proposals in Dodd-Frank on
shifting derivatives transactions away from over-the-counter to a
central clearing party should reduce risk but also provide “much greater
transparency, which contributes to stability.”
Bernanke likened a central clearing party to having all eggs in one
basket. “That being said, need to watch the basket,” Bernanke said.
Dodd-Frank provides that a key central clearing party will come
under much enhanced oversight, Bernanke said. Additionally, he noted the
Fed would act as a backstop regulator, making sure that a key central
clearinghouse infrastructure meets its requirements, all while being
held to high standards.
Proposed “backstop mechanisms” also give the Fed, “under carefully
monitored conditions,” the ability to provide backstop short-term
liquidity, should it become necessary, in exchange for good collateral,
Bernanke noted.
He also told the audience that the stress tests in 2009 were an
important milestone in that it helped banks raise considerable capital,
released information that let the public know “what the whole situation
was,” which ultimately allowed banks to function better.
Bernanke added that the Fed is working on rules for future annual
bank stress tests but that the Fed has yet to come to an “internal view”
on such new stress tests.
The Fed is still deciding on the amount of information gleaned from
future stress tests to be released to the public, Bernanke said.
“We are counting on banks cooperating with us and giving us access
to all their information,” he said. However, Bernanke added that in
releasing the information, “we do not want to expose information that is
damaging to their business, but rather we want to release information on
the banking system.” Thus, the Fed will have to try to find a way to
balance the information gathered.
Bernanke also said that the Fed is serious in its intent not to
burden smaller community banks, which continue to be rather healthy
financial institutions. Rather, future bank stress tests are aimed at
the largest and most systemically important banks with sophisticated
derivatives contracts. In fact, a new category of banks have been
created under the title of Globally Systemically Financial Institutions
GSFI, Bernanke told the audience.
Moreover, he said future bank stress tests will have a graded scale
for rules with the largest banks facing the highest capital
requirements.
** Market News International Chicago Bureau: (708) 784-1849 **
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