ben s bernanke : federal reserve ’ s exit strategy testimony by mr ben s bernanke, chairman of the board of governors of the federal reserve system, before the committee on financial services, us house of representatives, washington dc, 25 march 2010. * * * chairmen frank and watt, ranking members bachus and paul, and other members of the committee and subcommittee, i appreciate the opportunity to discuss the federal reserve ’ s strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity. as you know, i previously submitted prepared testimony for a hearing on this topic that was canceled because of weather conditions. i request that that testimony be included in the record of this hearing. this morning, in lieu of repeating my previous prepared statement, i would like to summarize some key points from the earlier testimony and update the committee on recent developments. broadly speaking, the federal reserve ’ s response to the crisis and the recession can be divided into two parts. first, our financial system during the past 2 – 1 / 2 years experienced periods of intense panic and dysfunction, during which private short - term funding became difficult or impossible to obtain for many borrowers. the pulling back of private liquidity at times threatened the stability of financial institutions and markets and severely disrupted normal channels of credit. in its role as liquidity provider of last resort, the federal reserve developed a number of programs to provide well - secured, mostly short - term credit to the financial system. these programs, which imposed no cost on taxpayers, were a critical part of the government ’ s efforts to stabilize the financial system and restart the flow of credit to american families and businesses. besides ensuring that a range of financial institutions – including depository institutions, primary dealers, and money market mutual funds – had access to adequate liquidity in an extremely stressed environment, the federal reserve ’ s lending helped to restore normal functioning and support credit extension in a number of key financial markets, including the interbank lending market, the commercial paper market, and the market for asset - backed securities. as financial conditions have improved, the federal reserve has substantially phased out these lending programs. some facilities were closed over the course of 2009, and most others expired on february 1. 1 the term auction facility, under which fixed amounts of discount window credit were auctioned to depository institutions, was discontinued in the past few weeks. as of today, the only facility still in operation that offers credit to multiple

for specific national features. if the european legislator has left it up to the national legislator to transpose these options – as is the case in around 20 instances – and the national legislator has done so in the form of a law, the ssm must respect this. we have to apply national law, even if this might impair the level playing field. the situation is different when the european legislator has left the exercise of national options to the discretion of the supervisor, as has been done in around 80 cases. over the past few months, we have made a list of all the national options and will come to a decision as soon as possible as to where we stand on every single one them, whether we will exercise them and if so, how. the national supervisors will play an important role in this respect, as they are the ones that will have to explain the national features and the related risks to us. they are the ones who should complement our knowledge of national markets and market structures, of national legal systems and risk trends. and we know, as supervisors, that some of these options are the result not of specific market structures, but of the continued existence of old traditions and popular habits. ( 2 ) good supervision in europe requires knowledge and experience of individual national as well as european markets and market structures ; it requires knowledge and experience of national and european legal systems. knowledge should be consolidated and decisions taken centrally at the european level so that attention is focused on the european interest instead of on the solely national interest. the division of tasks within the ssm provides for just that. as i said, the ecb will take complete responsibility for the direct supervision of significant institutions. but national supervisors will bring their knowledge and experience to the supervisory teams and support the ecb in its supervision, and they will do so in line with a single supervisory approach. it is our aim at the ecb to have detailed knowledge of the business model and risk profile of each of the 120 directly supervised institutions. we want to be able to assess, at any time, the risk - bearing capacity, the internal control systems and the governance of banks, and to intervene at an early stage when we see danger. in short, we intend to supervise intensively. i have already spoken in detail about the division of labour with regard to the less significant institutions. in both areas, then, knowledge of national and bis central bankers ’ speeches european markets will be brought together with a single evaluation system, a single supervisory approach and a