ben s bernanke : regulatory reform testimony of mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington dc, 1 october 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate the opportunity to discuss ways of improving the financial regulatory framework to better protect against systemic risks. in my view, a broad - based agenda for reform should include at least five key elements. first, legislative change is needed to ensure that systemically important financial firms are subject to effective consolidated supervision, whether or not the firm owns a bank. second, an oversight council made up of the agencies involved in financial supervision and regulation should be established, with a mandate to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies'responses to potential systemic risks. to further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators – not just the federal reserve – should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities. third, a new special resolution process should be created that would allow the government to wind down a failing systemically important financial institution whose disorderly collapse would pose substantial risks to the financial system and the broader economy. importantly, this regime should allow the government to impose losses on shareholders and creditors of the firm. fourth, all systemically important payment, clearing, and settlement arrangements should be subject to consistent and robust oversight and prudential standards. and fifth, policymakers should ensure that consumers are protected from unfair and deceptive practices in their financial dealings. taken together, these changes should significantly improve both the regulatory system's ability to constrain the buildup of systemic risks as well as the financial system's resiliency when serious adverse shocks occur. consolidated supervision of systemically important financial institutions the current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other financial firms – such as investment banks or insurance companies – that traditionally have not been subject to the type of regulation and consolidated supervision applicable to bank holding companies. to close this important gap in our regulatory structure, legislative action is

debt market, to increase the depth and the breadth of financial market. in relation to this, bis identified that the lack of diversified structure and market may lead to increased risk from concentration of credit and maturity risks in the banking system as lack of markets may lead to the mispricing of risk and excessive delay in correcting large exposures, as well as increased vulnerabilities from capital inflows. the second point we want to make is the importance of strong financial market infrastructure. one of the key issues for emerging markets is the structural weaknesses which can create disincentive and moral hazard. the presence of such distortions contribute to built - up of financial vulnerability, hinder growth of market solution for tackling risk, and complicate policy actions in events of crisis management. progress in correcting these weakness however may be slow. market - driven financial market developments need the support of critical infrastructure, namely : information that allows efficient decision making and pricing on various asset markets, financial as well as related market such as real estate market, which are still very lacking in many emerging markets, and may be an area of public support. legal reform to ensure enabling environment for innovation in products and business models of financial system. and human resource with proper competency in modern financial and risk management are scarce and is becoming a bottle neck for development. the authority may need to step in to facilitate training and accredition of professional standards, if it has external benefits. notwithstanding these challenges, notable progress has been made by emerging markets in the past decade, much of which catalysed by comprehensive economic reform in which market - oriented economic and financial liberalization been main features. for east asia, despite the progress made, significant gap still exists in diversification, efficiency and robustness when compared to the role played by financial markets in the developed economies. looking ahead, in addition to the pressure from globalization, the shift in demographic structure will also be an additional pressure. this is to say some smaller emerging markets will face aging population and increase demand of wealth management, while supply of local products are limited for diversification. this will pose challenges for inter - temporal allocation of resource and risk. thus, it is imperative that emerging market devise a proper strategy and process to expedite reforms and develop the financial system. the second long - term reform i want to bring up is on policy institution and framework. on this, two institutions are upmost important for attaining monetary and financial stability. the first is