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June 16, 2010 Wednesday 6:19 PM EST
SECTION: NEWS & COMMENTARY; Economy and Politics; The Fed
LENGTH: 367 words
HEADLINE: Fed probing bank ties to each other, Bernanke says
BYLINE: Greg Robb, MarketWatch mailto:email@example.com.
Greg Robb is a senior reporter for MarketWatch in Washington.
WASHINGTON (MarketWatch) — The Federal Reserve has started a program to measure the ties among the largest U.S. banks “to better identify potential channels of financial contagion,” Federal Reserve Board Chairman Ben Bernanke said Wednesday.
“[Fed] supervisors are working to improve their understanding of banks’ largest exposures to other banks, nonbank financial institutions, and corporate borrowers,” Bernanke said in a speech in New York at a conference releasing recommendations of the Squam Lake Group, 15 leading academics who have banded together to discuss ways to fix the financial system and avoid another crisis.
One of the recommendations of the academics was the creation of a single bank regulatory agency in the United States.
Bernanke pushed back on this idea, saying it might create “regulatory blind spots.”
In general, Bernanke agreed with much of the report.
He described it as a “valuable contribution” to the understanding of the crisis.
Bernanke said the Fed “strongly agrees” with two core principles of the Squam Lake report.
The first is that financial regulators can not focus narrowly on the health of one institution. Instead, policy makers must consider other factors, including the stability of the financial system as a whole and the firm’s interaction with the market.
The second principle is that the concept of “too big to fail” must be ended. Bernanke said the financial-reform legislation making its way through Congress contains the necessary resolution regime to end too big to fail.
In both the House and Senate versions of the legislation, the Federal Deposit Insurance Corp. would be given the authority to manage the resolution of banks and nonbanks.
A key challenge will be to get other countries to agree on cross-border aspects of such a resolution regime, Bernanke said.
House and Senate negotiators are meeting to smooth out differences between the two versions of the financial-reform legislation. The Obama administration is pushing for completion of the conference before the G20 leaders meet in Toronto at the end of next week.
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