Bernanke makes case for Federal Reserve to keep all banking oversight

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Wednesday urged Congress not to scale back the Fed's regulatory authority over banks. He said the Fed needs the information it gleans from its bank oversight to set interest rates and gauge the health of the banking system.

A Senate bill to overhaul financial regulation would strip the Fed of its power to supervise state-chartered banks and bank holding companies with assets of less than $50 billion. That would leave the Fed to oversee only 35 big bank holding companies.

Critics have blamed lax regulation at the Fed and at other agencies for contributing to the financial crisis.

Testifying to the House Financial Services Committee, Bernanke once again acknowledged that the Fed's past regulatory failures played a role in the crisis. But he said, as he has before, that the central bank has improved its regulatory oversight.

Other testifying at Wednesday's hearing echoed some of Bernanke's arguments:

Former Fed Chairman Paul Volcker also argued for the Fed to retain supervision over all the banks it now oversees. His reasons mirrored Bernanke's.

Small banks expressed support for continued regulation by the Fed. Jeffrey Gerhart, president of Bank of Newman Grove, said the Fed would lose information about local economies, which affects interest rate decisions, if it no longer supervised small banks.

Anil Kashyap, professor of economics and finance at the University of Chicago Booth School of Business, backed Bernanke's pitch for the Fed to retain its existing oversight.

Allan Meltzer, a professor at Carnegie-Mellon University, said he doubted any regulator could prevent all risks to the financial system.

But Bernanke's arguments to preserve all the Fed's supervisory powers drew skepticism from some House members at the hearing.

"Frankly, the Fed's performance ... has been inadequate," said Rep. Spencer Bachus of Alabama, the senior Republican on the committee. "In spite of its oversight, many of the large, complex banking organizations excessively leveraged and engaged in off-balance sheet transactions that helped precipitate the financial crisis."

The Fed oversees about 5,000 bank holding companies, about 850 smaller banks that are both state-chartered and belong to the Federal Reserve system and some foreign banks operating in the United States.

Legislation offered by Senate Banking Committee Chairman Christopher Dodd, D-Conn., would lift the Fed's power over state-chartered banks and smaller bank holding firms. But it would give the Fed new powers to oversee nonbank financial firms so large and interconnected that their failure could threaten the economy.

Such firms could include insurance giant American International Group Inc. or General Electric Co.'s GE Capital business.

Bernanke said the Fed worries about losing oversight of small banks and essentially becoming the "too big to fail regulator" under the Dodd bill.

"We want connections to Main Street as well as Wall Street," the Fed chief said.