Ben S Bernanke: Regulatory reform implementation
Testimony by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal
Reserve System, before the Committee on Banking, Housing, and Urban Affairs, US Senate,
Washington DC, 30 September 2010.
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Chairman Dodd, Ranking Member Shelby, and other members of the Committee, thank you
for the opportunity to testify about the Federal Reserve's implementation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).
In the years leading up to the recent financial crisis, the global regulatory framework did not
effectively keep pace with the profound changes in the financial system. The Dodd-Frank Act
addresses critical gaps and weaknesses of the U.S. regulatory framework, many of which
were revealed by the crisis. The Federal Reserve is committed to working with the other
financial regulatory agencies to effectively implement and execute the act, while also
developing complementary improvements to the financial regulatory framework.
The act gives the Federal Reserve several crucial new responsibilities. These responsibilities
include being part of the new Financial Stability Oversight Council, supervision of nonbank
financial firms that are designated as systemically important by the council, supervision of
thrift holding companies, and the development of enhanced prudential standards for large
bank holding companies and systemically important nonbank financial firms designated by
the council (including capital, liquidity, stress test, and living will requirements). In addition,
the Federal Reserve has or shares important rulemaking authority for implementing the
so-called Volcker Rule restrictions on proprietary trading and private fund activities of
banking firms, credit risk retention requirements for securitizations, and restrictions on
interchange fees for debit cards, among other provisions.
All told, the act requires the Federal Reserve to complete more than 50 rulemakings and sets
of formal guidelines, as well as a number of studies and reports, many within a relatively
short period. We have also been assigned formal responsibilities to consult and collaborate
with other agencies on a substantial number of additional rules, provisions, and studies.
Overall, we have identified approximately 250 projects associated with implementing the act.
To ensure that we meet our obligations in a timely manner, we are drawing on expertise and
resources from across the Federal Reserve System in areas such as banking supervision,
economic research, financial markets, consumer protection, payments, and legal analysis.
We have created a senior staff position to coordinate our efforts and have developed
projectreporting and tracking tools to facilitate management and oversight of all of our
implementation responsibilities.
The Federal Reserve is committed to its long-standing practice of ensuring that all its
rulemakings be conducted in a fair, open, and transparent manner. Accordingly, we are
disclosing on our public website summaries of all communications with members of the
public - including banks, trade associations, consumer groups, and academics - regarding
matters subject to a proposed or potential future rulemaking under the act.
In addition to our own rulemakings and studies, we have been providing technical and policy
advice to the Treasury Department as it works to establish the oversight council and the
related Office of Financial Research. We are working with the Treasury to develop the
council's organizational documents and structure. We are also assisting the council with the
construction of its framework for identifying systemically important nonbank financial firms
and financial market utilities, as well as with its required studies on the proprietary trading
and private fund activities of banking firms and on financial-sector concentration limits.
Additionally, work is well under way to transfer the Federal Reserve's consumer protection
responsibilities specified in the act to the new Bureau of Consumer Financial Protection. A
transition team at the Board, headed by Governor Duke, is working closely with Treasury
staff responsible for setting up the new agency. We have established the operating accounts
and initial funding for the bureau, and we have provided the Treasury detailed information
about our programs and staffing in the areas of rulemaking, compliance examinations, policy
analysis, complaint handling, and consumer education. We are also providing advice and
information about supporting infrastructure that the Bureau will need to carry out its
responsibilities, such as human resource systems and information technology.
Well before the enactment of the Dodd-Frank Act, the Federal Reserve was working with
other regulatory agencies here and abroad to design and implement a stronger set of
prudential requirements for internationally active banking firms. The governing body for the
Basel Committee on Banking Supervision reached an agreement a few weeks ago on the
major elements of a new financial regulatory architecture, commonly known as Basel III. By
increasing the quantity and quality of capital that banking firms must hold and by
strengthening liquidity requirements, Basel III aims to constrain bank risk-taking, reduce the
incidence and severity of future financial crises, and produce a more resilient financial
system. The key elements of this framework are due to be finalized by the end of this year.
In concordance with the letter and the spirit of the act, the Federal Reserve is also continuing
its work to strengthen its supervision of the largest, most complex financial firms and to
incorporate macroprudential considerations into supervision. As the act recognizes, the
Federal Reserve and other financial regulatory agencies must supervise financial institutions
and critical infrastructures with an eye toward not only the safety and soundness of each
individual firm, but also overall financial stability. Indeed, the crisis demonstrated that a too
narrow focus on the safety and soundness of individual firms can result in a failure to detect
and thwart emerging threats to financial stability that cut across many firms.
A critical feature of a successful systemic or macroprudential approach to supervision is a
multidisciplinary 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.1 The stress tests also showed how much the
supervision of systemically important institutions can benefit from simultaneous horizontal
evaluations of the practices and portfolios of a number of individual firms and from
employment of robust quantitative assessment tools. Building on that experience, we have
reoriented our supervision of the largest, most complex banking firms to include a
quantitative surveillance mechanism and to make greater use of the broad range of skills of
the Federal Reserve staff.
A final element of the Federal Reserve's efforts to implement the Dodd-Frank Act relates to
the transparency of our balance sheet and liquidity programs. Well before enactment, we
were providing a great deal of relevant information on our website, in statistical releases, and
in regular reports to the Congress. Under a framework established by the act, the Federal
Reserve will, by December 1, provide detailed information regarding individual transactions
conducted across a range of credit and liquidity programs over the period from December 1,
2007, to July 20, 2010. This information will include the names of counterparties, the date
and dollar value of individual transactions, the terms of repayment, and other relevant
information. On an ongoing basis, subject to lags specified by the Congress to protect the
efficacy of the programs, the Federal Reserve also will routinely provide information
regarding the identities of counterparties, amounts financed or purchased and collateral
pledged for transactions under the discount window, open market operations, and
emergency lending facilities.
To conclude, the Dodd-Frank Act is an important step forward for financial regulation in the
United States, and it is essential that the act be carried out expeditiously and effectively. The
Federal Reserve will work closely with our fellow regulators, the Congress, and the
Administration to ensure that the law is implemented in a manner that best protects the
stability of our financial system and strengthens the U.S. economy.