Would Fed Become the ‘Too-Big-To-Fail Regulator’?
Federal Reserve Chairman Ben Bernanke on Wednesday pushed back against a Senate proposal to strip from the Fed oversight of smaller banks by warning House lawmakers that it would narrow the central bank’s focus to giant firms.
“It makes us essentially the too-huge-to-fail regulator,” Mr. Bernanke told the House Financial Services Committee. “We don’t want that responsibility. We want to have a connection to Main Street as well as Wall Street.”
The legislative proposal released this week by Senate Banking Committee Chairman Christopher Dodd would make the Fed the supervisor of bank holding companies with assets greater than $50 billion. About 35 firms fall into that group.
Mr. Bernanke said Fed officials are “quite concerned” by the proposal because they want an understanding of firms of all sizes and at all levels. “Smaller and medium-sized banks are very valuable to us,” providing information for monetary plot, for understanding the economy and for financial stability. He reminded lawmakers that small institutions were part of prior financial crises.
Former Fed Chairman Paul Volcker, also testifying at the hearing, called the $50 billion barrier “arbitrary” and warned of the risks from separating out those firms. “We don’t want to single out some institutions as too huge to fail. We want a system in which particularly non-bank institutions can fail.”
Mr. Volcker later called the $50 billion threshold “much too low, in my opinion” in seminal which firms really would need to be saved.