“We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition a conference.
“If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said.
The recently enacted Dodd Frank Act set up governmental structures to analyze risk and to attempt to prevent a new financial failure as destructive as the one that damaged the world’s economy in 2008.
Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” or risk capable of causing broad financial failure, Bernanke said. Similar actions are underway in Europe and other parts of the world, and Bernanke said that regulators worldwide are in touch while also implementing their own systems.
If the new structures had been in place previously, Bernanke said, the 2008 financial crisis would likely have been averted. The old system of regulation, he said, had authority spread across many entities, coordination was lacking, and problems “fell through the cracks.”
As the Federal Reserve develops a structure for analyzing risk Bernanke said the focus must go beyond “fighting the last war.” Financial threats in the future could be different than financial threats in the past, he said.
Already new oversight is occurring in banking, he said. When large banks recently wanted to pay shareholders dividends, Bernanke said regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened. He said that the government’s new stress testing system has proven to provide accurate accessments of bank finances.
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