“We should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole,” the Federal Reserve chairman told the House Financial Services Committee Thursday.
This council would be able to scrutinize not simply the risks that emerge in particular sectors of the financial world, but in the growing interconnections between sectors and within massive companies.
The Fed, Bernanke said, would be a natural “consolidated supervisor” for the most complex institutions. Its supervisory role and the proposed changes to capital requirements it backs would “reduce the incentives for financial firms to become very large in order to be perceived as too big to fail.”
The regulatory council could address fears that the Fed would get too much power under President Barack Obama’s plan to rewrite the nation’s financial rules. In a nod to those concerns, “all federal financial supervisors and regulators — not just the Federal Reserve — should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities,” Bernanke said Thursday.
Bernanke also shed light on the Fed’s approach to the issue of executive compensation. Under current proposals, the Fed will in the future have power to reject broad compensation policies at major U.S. banks. Bernanke said Thursday that two principles will guide the Fed in this effort: executive pay should not provide incentives for taking risks, and appropriate links between performance and pay will be established.
The Fed’s power on this issue will also extend deep into the largest companies. “The Federal Reserve is about to issue guidance for comment on executive compensation which will apply not only to the top 5 or 10 executives, but way down into organization, traders or anybody whose activities would affect the risk profile of the company,” Bernanke said.