Bernanke to Urge ‘Strong’ Consumer Protection in House Hearing

By Scott Lanman and Craig Torres

Oct. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will tell lawmakers that protecting consumers of financial services is “vitally important,” while omitting prior criticism of an Obama administration proposal to shift such powers from the Fed to a new agency.

“It is vitally important that consumers be protected from unfair and deceptive practices in their financial dealings,” Bernanke says in testimony obtained by Bloomberg News and prepared for a hearing today of the House Financial Services Committee. “Strong consumer protection” helps preserve savings and promote confidence in financial firms and markets, he said.

Bernanke doesn’t discuss the proposal for a separate agency in the testimony, after saying in July that there would be disadvantages to creating one. That may soften a clash with Representative Barney Frank, the panel’s chairman, who said at a hearing yesterday that the Consumer Financial Protection Agency must be created because the Fed and other bank regulators did little to police lending abuses.

The Federal Reserve had a “lackadaisical record” on consumer protections and will cede its oversight power and funding to the agency, Frank said.

Frank, a Massachusetts Democrat, released a “report card” on Sept. 23 that he said demonstrated the Fed’s “poor record” in “using the tools provided by Congress to protect consumers from abusive financial-industry practices.”

July Criticism

The hearing with Bernanke is scheduled for 9 a.m. in Washington.

The 55-year-old Fed chief previously testified on potential changes to financial regulation in July, when he said there would be disadvantages to creating a consumer financial- protection agency.

Rules created by the Fed in recent years “benefited from the supervisory and research capabilities” of the central bank, Bernanke said in July.

The Fed chairman comes to Capitol Hill as Congress is preparing the most extensive overhaul of financial regulations since the Great Depression.

In response to congressional criticism, Fed officials have stepped up their scrutiny of bank lending, are overhauling their approach to supervision and trying to strengthen their commitment to consumer protection.

The Fed announced on Sept. 15 that it would begin looking at consumer compliance in non-bank subsidiaries of bank holding companies. Inside the Fed, Bernanke has also emphasized an integral approach to supervision, drawing on expertise across the Fed’s divisions, including Consumer and Community Affairs.

Rate Cut

The Fed chairman didn’t comment on the economy or interest rates in his prepared remarks. Central bankers left the benchmark lending rate unchanged in a range of zero to 0.25 percent last week and committed to buy the full amount of their $1.25 trillion mortgage-backed securities purchase program.

Lawmakers have shunned an Obama administration proposal that would give the Fed authority over the capital, liquidity, and risk management practices at systemically important financial institutions.

Instead, Frank said on Sept. 14 legislators will vest that authority in a council of regulators.

Bernanke says in today’s prepared testimony that the central bank is “well suited to serve as the consolidated supervisor for those systemically important financial institutions” not already under the Fed’s umbrella.

Also in the prepared remarks, Bernanke reiterates his call for other changes to regulation, including finding a way to wind down big financial companies without harming the financial system and allowing the government to “impose losses on shareholders and creditors of the firms.”

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.