ben s bernanke : regulatory restructuring 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, 10 july 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve systema€™s website. * * * chairman frank, ranking member bachus, and other members of the committee, i am pleased to be here today to discuss financial regulation and financial stability. the financial turmoil that began last summer has impeded the ability of the financial system to perform its normal functions and adversely affected the broader economy. this experience indicates a clear need for careful attention to financial regulation and financial stability by the congress and other policymakers. regulatory authorities have been actively considering the implications of the turmoil for regulatory policy and for private - sector practices. in march, the president's working group on financial markets ( pwg ) issued a report and recommendations for addressing the weaknesses revealed by recent events. 1 at the international level, the financial stability forum has also issued a report and recommendations. 2 between them, the two reports focused on a number of specific problem areas, including mortgage lending practices and their oversight, risk measurement and management at large financial institutions, the performance of credit rating agencies, accounting and valuation issues, and issues relating to the clearing and settlement of financial transactions. many of the recommendations of these reports were directed at regulators and the private sector and are already being implemented. these reports complement the blueprint for regulatory reform issued by the treasury in march, which focused on broader questions of regulatory architecture. 3 work is also ongoing to strengthen the framework for prudential oversight of financial institutions. notably, recent events have led the basel committee on banking supervision to consider higher capital charges for such items as certain complex structured credit products, assets in banks'trading books, and liquidity guarantees provided to off - balance sheet vehicles. new guidelines for banks'liquidity management are also being issued. regarding implementation, the recent reports have stressed the need for supervisors to insist on strong risk - measurement and risk - management practices that allow managers to assess the risks they face on a firmwide basis. in the remainder of my remarks i will comment briefly on three issues : the supervisory oversight of primary dealers, including the major investment banks ; the need to strengthen the financial infrastructure ; and the possible need for new tools for facilitating the orderly liquidation of a systemic

stability. an easing in financial conditions and greater public confidence should help promote more rapid economic growth and faster job gains over coming quarters. as i have said many times, however, monetary policy is not a panacea. although we expect our policies to provide meaningful help to the economy, the most effective approach would combine a range of economic policies and tackle longer - term fiscal and structural issues as well as the near - term shortfall in aggregate demand. moreover, we recognize that unconventional monetary policies come with possible risks and costs ; accordingly, the federal reserve has generally employed a high hurdle for using these tools and carefully weighs the costs and benefits of any proposed policy action. international aspects of federal reserve asset purchases although the monetary accommodation we are providing is playing a critical role in supporting the u. s. economy, concerns have been raised about the spillover effects of our policies on our trading partners. in particular, some critics have argued that the fed ’ s asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies. these capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows. i am sympathetic to the challenges faced by many economies in a world of volatile international capital flows. and, to be sure, highly accommodative monetary policies in the united states, as well as in other advanced economies, shift interest rate differentials in favor of emerging markets and thus probably contribute to private capital flows to these markets. i would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies, for several reasons. first, the linkage between advanced - economy monetary policies and international capital flows is looser than is sometimes asserted. even in normal times, differences in growth prospects among countries – and the resulting differences in expected returns – are the most important determinant of capital flows. the rebound in emerging market economies from the global financial crisis, even as the advanced economies remained weak, provided still greater encouragement to these flows. another important determinant of capital flows is the appetite for risk by global investors. over the past few years, swings in investor sentiment between “ risk - on ” and “ risk - off, ” often in response to developments in europe, have led to corresponding swings in capital flows. all told, recent