Bernanke seeks new powers for Fed

By Greg Robb, MarketWatch
Last update: 8:57 a.m. EDT July 8, 2008
WASHINGTON (MarketWatch) - Federal Reserve Chairman Ben Bernanke said Tuesday that the Fed should have additional powers to prevent and limit financial market turmoil.
Congress should consider giving the Fed power to set standards for capital liquidity holdings and risk management for investment banks, Bernanke said.
In the past, the Securities and Exchange Commission has been the primary regulator of broker dealers.

In addition, Congress might give the Fed broad power to promote financial market stability, Bernanke said.
If Congress makes this choice, "I do not think the Fed could fully meet these objectives without the authority to directly examine banks and other financial institutions that are subject to prudential regulation," Bernanke said.
Bernanke spoke at a conference on lending to low- and middle-income borrowers, sponsored by the Federal Deposit Insurance Corp. Bernanke did not discuss the economic outlook in his remarks.
Loans to brokers may be extended
In addition, Bernanke said the Fed is considering extending its emergency loans to broker-dealers beyond 2008, Bernanke said.
"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end," Bernanke said.
In March, as market conditions worsened, the Fed established two lending facilities for brokerages. One allows them to swap a range of illiquid assets for Treasury securities. The other facility provides cash to broker dealers in a system that is similar to its discount window for banks.
Turf battle
Increased power for one agency typically comes at the expense of other agencies that have their own strong alliances with powerful members of Congress.
Although Treasury Secretary Henry Paulson has said that he would like to see Congress give the Fed more power to ease the fallout of financial market turmoil on the economy, it is another matter for an agency to be seen as seeking power for itself.
As a result, Bernanke bent over backwards to suggest, rather than demand, that the Fed get broad new regulatory responsibilities.
But it was clear from his remarks that the Fed wants new powers.
"This is the first time I ever recall the Fed coming out and arguing that it needs to have expanded oversight and responsibilities," said former Fed official Robert Eisenbeis in comments to Bloomberg television.
"The Fed is seeking broad oversight responsibilities that have been rejected in the past," Eisenbeis said.
It is a wide open question what Congress will ultimately decide to do about the glaring inadequacies of the regulatory system that have come to light in the financial market crisis that began last summer.
Lobbyists for the financial market industries have made careers provoking, easing and maneuvering around battles over regulatory turf.
Under previous Fed chief Alan Greenspan, the Fed was an aggressive agency in terms of regulatory authority, perfectly willing to use sharp elbows against other regulators. As a result, some ill feeling lingers.
The Fed would like greater authority to get detailed information about money markets and the activities of borrowers and lenders in those markets, Bernanke said.
The surprising freeze-up of money markets last August was one of the first signs of trouble for financial markets.
Bernanke said that "a strong case" could be made for granting the Fed explicit oversight authority over systemically important payment and settlement systems. End of Story
Greg Robb is a senior reporter for MarketWatch in Washington.