WASHINGTON (MNI) – The following is the text of Federal Reserve
Chairman Ben Bernanke’s written testimony before the Senate Banking,
Housing, and Urban Affairs committee who will hold a hearing on enhanced
oversight after the financial crisis at 10:00 a.m ET on Thursday July
21:

Chairman Johnson, Ranking Member Shelby, and other members of the
Committee, thank you for the opportunity to testify on the first
anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (Dodd-Frank Act).1

On this anniversary, it is worth reminding ourselves of why the
Congress passed sweeping financial reforms a year ago. The financial
crisis of 2008-09 was unprecedented in its scope and severity. Some of
the world’s largest financial firms collapsed or nearly did so, sending
shock waves through the highly interconnected global financial system.
Critical financial markets came under enormous stress. Asset prices
fell sharply and flows of credit to American families and businesses
were disrupted. The crisis, in turn, wreaked havoc on the U.S. and
global economies, causing sharp declines in production and trade and
putting millions out of work. Extraordinary actions by authorities
around the world helped stabilize the situation, but, nearly three years
later, the recovery from the crisis in the United States and in many
other countries remains far from complete.

In response to the crisis, we have seen a comprehensive re-thinking
and reform of financial regulation, both in the United States and around
the world. Among the core objectives of both the Dodd-Frank Act and the
global regulatory reform effort are: enhancing regulators’ ability to
monitor and address threats to financial stability, strengthening both
the prudential oversight and resolvability of systemically important
financial institutions (SIFIs), and improving the capacity of financial
markets and infrastructures to absorb shocks. I will briefly discuss
each of these objectives.

First, to help regulators better anticipate and prepare for threats
to financial stability, legislatures in both the United States and other
developed economies have instructed central banks and regulatory
agencies to adopt what has been called a macroprudential approach to
supervision and regulation–that is, an approach that supplements
traditional supervision and regulation of individual firms or markets
with explicit consideration of threats to the stability of the financial
system as a whole. Under a macroprudential approach, regulators are
enjoined not only to look for emerging financial risks but also to try
to identify structural weaknesses or gaps in the regulatory system,
thereby helping the regulatory framework keep pace with financial
innovation and other market developments.

As you know, the Dodd-Frank Act created a council of regulators,
the Financial Stability Oversight Council, to coordinate efforts to
identify and mitigate threats to U.S. financial stability across a range
of institutions and markets. The Council’s monitoring efforts are well
under way, and this new organization has contributed to what has been a
very positive atmosphere of consultation and coordination among its
member agencies. The Council is also moving forward with its rulemaking
responsibilities, including rules under which it will be able to
designate systemically important nonbank financial institutions and
financial market utilities for additional supervisory oversight,
including by the Federal Reserve. For its part, the Federal Reserve has
also made organizational changes to promote a macroprudential approach
to regulation. Among these changes is the establishment of high-level,
multidisciplinary working groups to oversee the supervision of large,
complex banking firms and financial market utilities, with a strong
focus on developments that have implications for financial stability.
We have also created an Office of Financial Stability Policy and
Research to help coordinate our efforts to identify and analyze
potential risks to the broader financial system and to serve as liaison
with the Council.

A second major objective of financial reform is to mitigate the
threats to financial stability posed by the too-big-to-fail problem.
Here the Dodd-Frank Act takes a two-pronged approach. The first prong
empowers the Federal Reserve to reduce a SIFI’s probability of failure
through tougher prudential regulation and supervision, including
enhanced risk-based capital and leverage requirements, liquidity
requirements, single-counterparty credit limits, stress testing, an
early remediation regime, and activities restrictions. The Federal
Reserve and other agencies face the ongoing challenge of aligning
domestic regulations with international agreements, including the Basel
III requirements for globally active banks. These efforts are going
well; in particular, the Federal Reserve expects to issue proposed rules
on the oversight of SIFIs later this summer and, working with other
banking agencies, is on schedule to implement Basel III.

Ending too-big-to-fail also requires allowing a SIFI to fail if it
cannot meet its obligations–and to do so without inflicting serious
damage on the broader financial system. Thus, the second prong of the
Dodd-Frank Act’s effort to end too-big-to-fail empowers the Federal
Reserve and the Federal Deposit Insurance Corporation (FDIC) to reduce
the effect on the system in the event of a SIFI’s failure through tools
such as the new orderly liquidation authority and improved resolution
planning by firms and supervisors. In particular, the Federal Reserve
is working with the FDIC to require SIFIs to better prepare for their
own resolution by adopting so-called living wills. A joint final rule
on living wills is expected later this summer.

Reducing the likelihood of a severe financial crisis also requires
strengthening the resilience of our financial markets and
infrastructure–a third major objective of the Dodd-Frank Act. Toward
that end, provisions of the act improve the transparency and stability
of the over-the-counter derivatives markets and strengthen the oversight
of financial market utilities and other critical parts of our financial
infrastructure. We and our colleagues at the Securities and Exchange
Commission, the Commodity Futures Trading Commission, and other agencies
are moving this work forward, in consultation as appropriate with
foreign regulators and international bodies. The U.S. agencies are also
working together to address structural weaknesses in areas not
specifically addressed by the Dodd-Frank Act, such as the triparty repo
market and the money market mutual fund industry.

To be sure, any sweeping reform comes with costs and uncertainties.
In implementing the statute, the Federal Reserve is committed to the
promulgation of rules that are economically sensible, appropriately
weigh costs and benefits, protect smaller community institutions, and,
most important, promote the sound extension of credit in the service of
economic growth and development. A full transition to the new system
will require much more work by both the public and private sectors, and
no doubt we will learn lessons along the way. However, as we work
together to implement financial reform, we must not lose sight of the
reason that we began this process: ensuring that events like those of
2008 and 2009 are not repeated. Our long-term economic health requires
that we do everything possible to achieve that goal.

Thank you. I would be pleased to take your questions.

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

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