–Fed Began ‘Enhanced’Quantitative Surveillance of Lrg Holding Companies

By Yali N’Diaye

WASHINGTON (MNI) – Monetary policy is a “blunt” instrument and for
that reason is not as effective as supervision and regulation to improve
financial stability, Federal Reserve Chairman Ben Bernanke underlined
Thursday.

And the central bank is doing its part in improving such
supervision, having “adopted a more explicitly multidisciplinary
approach, making use of the Federal Reserve’s broad expertise in
economics, financial markets, payment systems, and bank supervision,”
Bernanke said in a testimony prepared for the Financial Crisis Inquiry
Commission.

This approach is combined with an augmented use of the “traditional
supervisory approach” and enhanced quantitative surveillance, he said in
a testimony generally looking back at the history of the financial
crisis and which made no reference to current monetary policy and
economic developments.

“To supplement information from examiners in the field, we have
begun an enhanced quantitative surveillance program for large bank
holding companies that will use data analysis and formal modeling to
help identify vulnerabilities at both the firm level and for the
financial sector as a whole,” Bernanke said during the hearing on “Too
Big to Fail: Expectations and Impact of Extraordinary Government
Intervention and the role of Systemic Risk in the Financial.”

“This analysis will be supported by the collection of more timely,
detailed, and consistent data from regulated firms,’ he continued.

The Fed is also playing a key role in such supervisory and
regulatory efforts at the international level “to ensure that
systemically critical financial institutions hold more and
higher-quality capital, have enough liquidity to survive highly stressed
conditions, and meet demanding standards for company-wide risk
management.”

That is not to say the central bank “categorically” rules out
monetary policy to address financial imbalances, Bernanke stressed.

In fact, the Federal Open Market Committee is “closely monitoring
financial conditions for signs of such imbalances and will continue to
do so.”

“However, whenever possible, supervision and regulation should be
the first line of defense against potential threats to financial
stability,” he said, stressing monetary policy is a “blunt tool.”

And to those arguing that monetary authorities should have raised
interest rates faster to address the housing bubble, especially as the
Fed contributed to its formation through its low interest rate policy,
Bernanke responded that is not supported by empirical evidence.

“Studies of the empirical linkage between monetary policy and house
prices have generally found that that linkage is much weaker than would
be needed to explain the behavior of house prices in terms of FOMC
policies during this period,” he said.

“Cross-national evidence also does not favor this hypothesis,” he
continued.

Besides, raising interest rates to manage housing prices at that
time would have had “large side effects on other assets and sectors of
the economy.”

Hence the need to address financial stability through better
supervision and regulation.

Despite the best efforts from regulators and the recently enacted
financial reform, however, “We should not imagine, though, that it is
possible to prevent all crises,” Bernanke warned.

Still, much can be done to prevent such crises, Federal Deposit
Insurance Corp. Chairman Sheila Bair, testifying before the same
Commission, said.

“If our economy is to prosper, and if our nation is to meet the
economic challenges looming ahead, our financial sector simply must do
its job better,” she said in prepared remarks.

To that effect, “We are working with our regulatory counterparts to
quickly and carefully implement regulations in the areas of liquidation
authority and the Financial Stability Oversight Council, and are working
with our counterparts on the Basel Committee with regard to
international capital standards,” she added.

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

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