Bernanke: Four Element Strategy for Financial Regulation

by: Scott_Brown

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

As Fed Chairman Bernanke has repeatedly indicated, “until we stabilize the financial system, a sustainable economic recovery will remain out of reach.” On Tuesday, Bernanke laid a groundwork for financial sector reform. He called for greater regulation, but also suggested that pro-cyclical accounting rules might be bent in extraordinary times. Congress appears to be on board with this idea, and will move quickly to modify the mark-to-market rule. The devil will be in the details.

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Bernanke highlighted four key elements of a holistic strategy for financial regulation. First, we must address the problem of financial institutions that are deemed too big to fail. Second, we must strengthen the financial infrastructure (the system, rules, and conventions governing trading, payment, clearing, and settlement). Third, we must review regulatory policies and accounting rules to make sure that they are not excessively pro-cyclical – that is, that they do not magnify economic downturns. Finally, we should consider the creation of an authority to monitor and address systemic risks.

The current crisis has revealed a number of regulatory shortfalls regarding institutions that are deemed too big to fail. The Fed has done its part, by examining risk-management practices of these firms. However, more substantial regulation will be needed to prevent repeats of the current financial crisis.