ben s bernanke : the dodd - frank act 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, 21 july 2011. * * * 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

and harm to the reputation of the international monetary fund and its ability to raise funds outside europe. i am therefore very glad that this session is devoted to the facility, whose importance to europe and especially to the euro area is much greater. bis central bankers ’ speeches i could list other problems, such as the delayed consolidation of the european banking system and the related recapitalisation of banks, and in particular the fact that the existence of the euro area has widened the long growing imbalance in the exchange of goods, capital and savings between euro area countries. the short - term rescue of the euro will not directly solve the long - term problem of imbalances, and in particular the gradually emerging path towards a fiscal pact with no significant redistribution of resources at european level will require the elimination of, or at least a considerable reduction in, the imbalances in the euro area. in the context of the three change drivers i mentioned earlier, i would like to say that the time that the ecb ’ s pre - christmas actions gave the euro area, the european financial sector and many european states to solve their problems is useful but not infinite. i believe that the potential of the fiscal pact to become a true change driver is smaller than generally assumed, and i expect that the future formulation of the pact in the constitution of each country will contain ( abusable ) escape clauses. i base this view in particular on the fact that throughout its existence the euro area has had a tendency to soften or bend the criteria for its operation. be it the not - always - proper manner of fulfilment of the maastricht criteria by accession countries or the revision of the stability and growth pact or the purchase of government bonds by the european central bank, we have repeatedly seen how things that are initially unthinkable become reality over time. i am doubtful that investors, who are well aware of europe ’ s relationship to the rules, will change their attitude as a result of the fiscal pact. my overall view on the current design of the facility is none too optimistic. to enhance its ability to face the debt crisis, we need to find a clear consensus on its mission. we need to precisely identify whom it is supposed to help, under what circumstances and to what extent, and to derive from that the amount of funding it needs. this will predetermine the solutions to all the issues surrounding its operation. we have time to solve all these problems, but not much time. thank you