Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress they agreed the Fed needs a stronger hand in supervising investment banks to help shield the broader economy from problems like the ones that forced the emergency rescue of investment bank Bear Stearns.
"The Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline," Paulson told Congress.
"We should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions ... and the tools to intervene to mitigate systemic risk in advance of a crisis," he said.
"Cooperation between the Fed and the SEC (Securities and Exchange
Commission) is taking place within the existing statutory framework
with the objective of addressing the near-term situation," Bernanke
said in comments that echoed a speech he gave on Tuesday.
"In the longer term, however, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers," he said.
"Any potential commitment of government support should be an extraordinary event that requires the engagement of the Treasury Department and contains sufficient criteria to prevent costs to the taxpayer to the greatest extent possible," he added.
"The Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline," Paulson told Congress.
"We should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions ... and the tools to intervene to mitigate systemic risk in advance of a crisis," he said.
"Cooperation between the Fed and the SEC (Securities and Exchange
Commission) is taking place within the existing statutory framework
with the objective of addressing the near-term situation," Bernanke
said in comments that echoed a speech he gave on Tuesday.
"In the longer term, however, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers," he said.
"Any potential commitment of government support should be an extraordinary event that requires the engagement of the Treasury Department and contains sufficient criteria to prevent costs to the taxpayer to the greatest extent possible," he added.
"Regulation alone cannot eliminate all future bouts of instability,"
Paulson said. He added that market participants should not count on
getting lending from the Fed or any other government support easily.
"For market discipline to effectively constrain risk, financial institutions must be allowed to fail," Paulson said.
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