Bernanke gives testimony about its new role as regulator in chief
Bernanke is getting excited about his new role as regulator in chief as established in Dodd-Frank. His latest prepared remarks say nothing about monetary policy or the economy. It talks about the new and pointless Bureau of Consumer Financial Protection (CFPB). This new regulator will help determine if your bank is setting a fair rate. It won't help reduce credit card costs and will add a new layer of prying eyes between you and your bank. Via Econoday:
"The transfer of the Federal Reserve's consumer protection responsibilities specified in the act to the new Bureau of Consumer Financial Protection (CFPB) is well under way."Notice that they hold discretion as to whom they will monitor and they have the ability to supervise non-bank financial firms that the council designates as systematically important. That means companies such as Western Union, Moneygram, Paypal, or even your phone company could fall under the watch of the hallowed Fed.
"One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.
"Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.
"To be effective, regulation must be supported by strong supervision. The act expands the supervisory responsibilities of the Federal Reserve to include thrift holding companies and nonbank financial firms that the council designates as systemically important, along with certain payment, clearing, and settlement utilities that are similarly designated. Reflecting the expansion of our supervisory responsibilities, we are working to ensure that we have the necessary resources and expertise to oversee a broader range of financial firms and business models.
"The act also requires supervisors to take a macroprudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.This is how Dodd-Frank deals with systematic issues. It delegates them to the Federal reserve. It is not up to the market to determine counterparty risk, but now up to the Fed. That is a dangerous game to play as it will very likely lead to increased counterparty and systematic risk because all risk management is being done by the Fed, which is run by humans and prone to mistakes. Banks will do less risk management than before because they will see the stamp of the Fed as a green light to do business instead of taking the time to assess risk themselves.
"We believe that a successful macroprudential approach to supervision requires both a multidisciplinary and wide-ranging perspective. Our experience in 2009 with the Supervisory Capital Assessment Program (popularly known as the bank stress tests) demonstrated the feasibility and benefits of employing such a perspective. Building on that experience and other lessons learned from the recent financial crisis, we have reoriented our supervision of the largest, most complex banking firms to include greater use of horizontal, or cross-firm, evaluations of the practices and portfolios of firms, improved quantitative surveillance mechanisms, and better use of the broad range of skills of the Federal Reserve staff. And we have created a new Office of Financial Stability within the Federal Reserve, which will monitor financial developments across a range of markets and firms and coordinate with the council and with other agencies to strengthen systemic oversight."