Since former Treasury Secretary Henry A. Paulson and his colleagues first started talking about financial markets reform, the rumor has been that the Federal Reserve would take on broader regulatory responsibilities in terms of watching for and dealing with systemic risk. The Fed, after all, is in the best position to conduct market oversight, observers said.
This week, though, Federal Reserve Chairman Ben Bernanke will tell legislators that he and his agency are taking a step back. Reuters reports that Bernanke supports the creation of a "broad council of financial regulators" to monitor said risk. In remarks prepared for testimony before the House Financial Services Committee on Thursday, Bernanke said:
The...task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets -- both regulated and unregulated -- may exceed the capacity of any individual supervisor. Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole.
The move seems to indicate a change in Bernanke's tone, according to Reuters writer Kevin Drawbaugh, who says Bernanke is bowing to those who have criticized the Fed's own role in failing to recognize the risks that ultimately sent the world markets into a recession. No matter what has motivated the change, policy analyst Joe Engelhard told Reuters it is a smart one.
World Bank President Robert Zoellick, Republicans in the U.S. House of Representatives, and even Senate Banking Committee Chairman Christopher Dodd (D-Conn.) are among those who have questioned whether allowing the Fed alone to have so much power is wise.