Federal Reserve Chairman Ben Bernanke was on the Hill this week to deliver his “Semi-Annual Monetary Policy Report” to both houses of Congress. Before both legislative bodies, he was asked about “too-big-to-fail” (TBTF) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, (Dodd-Frank). Chairman Bernanke addressed several common misconceptions of TBTF, and made clear that Dodd-Frank contains various mechanisms such as living wills and orderly liquidation authority, which did not previously exist, thus allowing regulators to wind down a financial institution without jeopardizing taxpayer dollars. Below are highlights of a number of exchanges before the Senate Banking Committee and the House Financial Services Committee:
Bernanke: “In designating firms as systemically important, which is not the same at too-big-to-fail, we look at not just the size, but the complexity, the interconnectedness to other banks the kinds of activities they have and so on. So a simple dollar number is not really adequate to describe whether a bank is systemically critical or not.”
- In response to a question from Congressman Lynn Westmoreland (R-GA), House Financial Services Committee Hearing, February 27, 2013
Bernanke: “We didn’t have the tools [during the crisis], now we have the tools… Some of these rules take time to develop. With the orderly liquidation authority, we've made a lot of progress on that. We've got living wills. I think we're moving in the right direction. If more steps are needed, then obviously Congress can discuss those. But we have a plan and I think we're moving in the right direction.”
- In response to questions from Senator Elizabeth Warren (D-MA), Senate Banking Committee Hearing, February 26, 2013
Bernanke: If it relates to the bigger issue of TBTF, we also agree that’s something that really needs to be addressed and many parts of Dodd-Frank are intended to address that and [the Fed] has been pushing those as hard as we can…Getting rid of TBTF is an important objective and we’re working in that direction.
- In response to a question from Senator Jeff Merkley (D-OR), Senate Banking Committee, February 26, 2013
Bernanke: “Dodd-Frank has a strategy. It involves making big institutions internalize, and take account of, their systemic costs by tougher regulation, higher capital charges and so on, the orderly liquidation authority and strengthening the entire system. So there's steps that we are taking that are moving in that direction. I think the markets will come to see that these steps are effective.”
- In response to Congressman Michael Capuano (D-MA), House Financial Services hearing, February 27, 2013
Bernanke: "There's a three-part plan [to address TBTF] under Dodd-Frank. Part number one is to impose costs on large institutions that offset the benefits they get in the funding markets -- for example, capital surcharges, activity restrictions, liquidity requirements, living wills, a whole bunch of other things that impose greater cost and force the largest firms to take into account their systemic footprint. That's number one. Number two is the orderly liquidation authority, which we're working closely with the FDIC and with our foreign counterparts to figure out how we would take down a large institution without bringing down the system. And part three is a whole raft of measures to try to strengthen the overall financial system so it will be more credible that we can take down a large institution without bringing down the system. That's sort of the three-part plan. And it's working ... For example, even though U.S. banks are stronger financially than European banks, frequently U.S. banks have wider credit default swap spreads, indicating a higher probability of actual failure because of the differences between U.S. and Europe in terms of perceived government support.
- In response to Senator David Vitter (R-LA) on ending too-big-to-fail, Senate Banking Committee hearing, February 26, 2013
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