Fed Chairman Bernanke Offers a Four-point Strategy for a New Regulatory Framework

Federal Reserve Chairman Ben S. Bernanke called for a broad reworking of regulations governing the financial system to guard against catastrophic meltdowns like the one that has hobbled the global economy since late 2007. In remarks (full text) today before the Council on Foreign Relations in Washington, D.C., the Fed chairman said: "We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim."

Bernanke then identified four key elements for such a strategy: "First, we must address the problem of financial institutions that are deemed too big — or perhaps too interconnected — to fail. Second, we must strengthen what I will call the financial infrastructure — the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets — to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not … overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing."

Wharton faculty and other experts whose ideas have appeared in Knowledge at Wharton have offered similar suggestions for regulatory reform in the aftermath of the worst financial collapse since the Great Depression. For example, just as Bernanke called for a "holistic" approach to fixing the regulatory framework, Wharton finance professor Richard Marston told Knowledge at Wharton: "We'll have to start from scratch again and think about how we regulate finance and allow it to thrive, and not take undue risk which society as a whole has to pay for. It's a balancing act. Everything is on the table." In that same article, titled, "Getting It Right: Making the Most of an Opportunity to Update Market Regulation," Wharton finance professor Marshall Blume spoke to Bernanke's concern about systemic risk: "We have centralized oversight of systemic risk; however, I don't believe the Fed has the tools necessary to do an adequate job there." Wharton faculty have also addressed post-crisis regulatory reform in Knowledge at Wharton articles including: "CEOs and Market Woes: Is Poor Corporate Governance to Blame?"

For an archive of Knowledge at Wharton's continuing coverage of the financial crisis, see: "Wall Street's Day of Reckoning: What's Next?"