Limiting central banks role will hit economic stability: Bernanke

Written by Bloomberg | Updated: Dec 1 2009, 05:07am hrs
Curbing the central banks authority to supervise the banking system and tampering with its independence would seriously impair economic stability in the US, Federal Reserve chairman Ben S Bernanke said.

A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions, the Fed chairman said in a commentary in Washington Post. The measures would seriously impair the prospects for economic and financial stability in the US. Bernanke has presided over the most expansive use of Fed powers since the Great Depression. While the Fed chairman has said he averted a financial meltdown, lawmakers have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantling of Fed authority since the creation of the institution in 1913. Bernankes commentary is his first comprehensive answer to proposals in the House and Senate that would limit the Feds supervisory powers and exert more political oversight in the setting of interest rates. The issues are likely to be discussed when he faces the Senate Banking Committee on December 3 for a hearing on his nomination to a second term as chairman.

In the current environment with so much borrowing by the government, the political pressure on the Fed is out there, said James Glassman, senior economist at JPMorgan Chase & Co. I don't think you can totally dismiss it.

Senate Banking Committee Christopher Dodd, a Democrat from Connecticut, has criticised the central bank for lax supervision and introduced legislation this month that would strip bank oversight from the Fed and create a single bank regulator. Dodd would also limit the central bank's ability to loan to individual companies.

There is a strong case for a continued role for the Federal Reserve in bank supervision, Bernanke said. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks.The Fed chairman pointed to capital adequacy tests the Fed performed in May which helped restore confidence in the banking system. The Standard and Poors 500 Index has increased 34 % since May 1, outperforming the S&P 500 by about 10 percentage points. The Fed has done a very remarkable job managing the financial crisis and the recovery of the financial markets is a testimony to that, Glassman said. Of all the things to fix, why would we tamper with the one that actually has worked well

Dodd and Representative Barney Frank, chairman of the House Financial Services Committee, want to take away the Fed's rule-writing power on consumer financial products and give it to a new Consumer Financial Protection Agency. The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis, Bernanke said.

The Fed has reviewed its performance and moved aggressively to fix the problems, he added.