Fed has power to fight crises, says Bernanke

Law gives tools to close down financial institutions

washington — Chairman Ben Bernanke said on Friday that the Federal Reserve is drafting rules to close large insolvent banks without bringing down the broader US financial system, one of many steps regulators must take to prevent another financial crisis.

Bernanke said the absence of a process to deal with systemically important institutions in 2008 left regulators facing the “terrible choices of a bailout or allowing a potentially destabilising collapse.”

His comments were made at a conference sponsored by the International Monetary Fund.

The financial overhaul law passed by Congress in 2010 gave regulators better tools to close down large financial institutions, he said. The central bank and other regulators are working to implement those rules. “Our continuing challenge is to make financial crises far less likely and, if they happen, far less costly,” Bernanke said.

Bernanke did not make any comments during his appearance about current economic conditions or the Fed’s interest rate policies.

“As we try to make the financial system safer, we must inevitably confront the problem of moral hazard,” Bernanke said.

“Market discipline can only limit moral hazard to the extent that debt and equity holders be-

Our challenge is to make financial crises far less likely and, if they happen, far less costly

Ben Bernanke

lieve that, in the event of distress, they will bear costs.”

He addressed the economy only briefly during the panel discussion, saying that there was still “an awful lot of slack in the labor market” and said that was justification for the Fed taking “strong actions to try to support job creation.”

In response to audience questions, Bernanke said that the high level of student debt is “another drag on the recovery” although it is not likely to cause a financial crisis because most such loans are owned by the government, not financial institutions.

Bernanke spoke as part of a panel discussion that included Harvard University’s Kenneth Rogoff, the co-author of the history of financial crises titled “This Time Is Different: Eight Centuries of Financial Folly”; former Bank of Israel governor Stanley Fischer; and former US Treasury Secretary Larry Summers.

Summers was under consideration by President Barack Obama to become Bernanke’s successor, when his term expires in January. He withdrew from the process in September, saying the confirmation would have been “acrimonious.”