- The Washington Times - Tuesday, March 10, 2009

WASHINGTON (AP) — The nation’s financial regulatory system must be overhauled to strengthen oversight of banks, mutual funds and large financial institutions whose collapse would put the entire economy in peril, Federal Reserve Chairman Ben Bernanke said Tuesday.

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

The Fed chief’s remarks come as the Obama administration and Congress are starting to crafting their overhaul strategies. For the administration, critical work on that front will be carried out among global finance officials this weekend in London. That will help set the stage for a meeting of leaders from the world’s 20 major economic powers in April.

Revamping the U.S. financial rule book — a patchwork that dates to the Civil War — is a complex task. Congress, the administration and the Fed are involved because they want to strengthen the system to prevent a repeat of the financial crisis — the worst since the 1930s— that has plunged the U.S. and many other countries’ economies into recession.

Bernanke laid out four key elements that should guide the regulatory overhaul. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in an orderly way — similar to how bank failures are handled by the Federal Deposit Insurance Corp. — to minimize fallout to the financial system and to the national economy.

Moreover, such “too big to fail” companies must be subject to more rigorous supervision to prevent them from taking excessive risk, Bernanke said. The Fed is trying to identify “best practices” that can help companies detect trouble spots and best manage their risks.

The government over the past year has been forced to rescue major financial companies so interwoven with other players and the global financial system that their collapse would put the entire economy in danger. The bailouts of insurance giant American International Group Inc., Citigroup Inc., Bank of America Corp., and mortgage finance companies Fannie Mae and Freddie Mac have put billions of taxpayers’ dollars at risk and angered the American public.

“Government rescues of too-big-to fail firms can be costly to taxpayers, as we have seen recently,” Bernanke said. “Indeed in the present crisis, the too-big-to-fail issue has emerged as an enormous problem.”

Bernanke also said the nation’s financial plumbing — the infrastructure and policies that govern financial transactions— must be strengthened to ensure that it will perform under stress.

A third component calls for reviewing regulatory policies and accounting rules to make sure they don’t “overly magnify the ups and downs in the financial system and the economy,” he said. Finally, the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one.

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