Bernanke Says G20 Should Guide Regulatory Revamp

March 11, 2009

Federal Reserve Chairman Ben Bernanke Tuesday said leaders from the Group of 20 rich and developing economies should agree early next month on principles to guide nations as they revamp financial rules to prevent future crises.

Finance ministers from the G20 meet this weekend in London to lay the groundwork for an April 2 leader’s summit where regulatory reform is expected to feature prominently.

“It’s asking too much for a meeting like that to come out with detailed proposals in many different areas,” Bernanke told the Council on Foreign Relations. “The better goal for a meeting of leaders would be, as much as possible, to establish some principles that would guide reforms around the world.”

Officials hope that by revamping regulation they can erect stronger bulwarks against the kind of financial turmoil that has throttled global markets.

“In particular, we need to work together effectively to make sure that we have solutions for our banking systems that are not mutually inconsistent or create problems across jurisdictions,” Bernanke said.

U.S. Treasury Secretary Tim Geithner underscored that view, saying regulators around the world should not undercut one another by offering more relaxed standards.

“We have to get the major financial centers around the world around the table … and agree on a common set of rules of the game that are applied more evenly across all those critical institutions,” he said on Public Broadcasting’s “Charlie Rose Show, ” adding that “what we can’t allow is a race to the bottom on the regulatory standards.”

Bernanke said the United States should have one regulator charged with overseeing the soundness of the entire financial system. Currently, various agencies are responsible for ensuring the health of specific institutions.

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” Bernanke said.

FED NEEDS A ROLE
U.S. lawmakers will hold hearings this month on the issue. Some members of Congress have said the Fed should take on the systemic risk role. Others are concerned that it would distract the central bank from its traditional monetary policy focus.

Bernanke did not firmly lay claim to the role of systemic risk overseer. “The extent to which this new responsibility might be a good match for the Federal Reserve depends a great deal on precisely how the Congress defines the role,” he said.

“It seems to me that we should keep our minds open on these questions. … Identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role,” he said.

Bernanke said evidence suggests existing bank capital standards and accounting rules “have made the financial sector excessively procyclical” by encouraging banks to go too far on easing credit in booms and tightening it in downturns.

He urged review of bank capital standards so that “capital is allowed to serve its intended role as a buffer — one built up during good times and drawn down during bad times in a manner consistent with safety and soundness.”

Bernanke strongly endorsed the concept of current mark-to-market accounting rules, which require banks to value assets they hold at the price they might fetch in the market, but said improvements could be made.

In particular, he said authorities could provide guidance on how to value assets when markets are illiquid. Banks have taken huge losses as they have written down hard-to-trade assets under the current rules, choking off fresh lending.

“Further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency.”

In addition he urged consideration of further steps “to reduce the possible procyclical effects of deposit insurance costs” on banks.

A rise in bank failures has led the Federal Deposit Insurance Corp to ask banks to replenish the deposit insurance fund, further straining bank capital, although it has tried to ease the burden on them by extending the timeframe to do this.

(Additional reporting by Emily Kaiser and Alister Bull; Editing by James Dalgleish and Leslie Adler)

Latest Comments

  • March 11, 2009 at 3:37 am
    Nebuchenezzar says:
    Great!! Each of these governments has managed to ruin "their" country's monetary system and economy. Now they want to join together so they can do one big screw-up for the w... read more
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