WASHINGTON--Federal regulators lack the power to deal appropriately with insurers and other non-banking institutions that get into the kind of financial trouble that can pose grave risks to the entire economy, and legislation is needed to fix this, the Federal Reserve Board chairman said.

Speaking during his semi-annual monetary policy report to Congress on Tuesday, Federal Reserve Board Chairman Ben Bernanke said the problems with American International Group demonstrated that federal regulators lack the authority to take appropriate action when needed against non-banking institutions.

"One of the big problems is that if we wanted to close down a major institution, we don't have the legal authorities and the framework to do it," he said.

His comments came during a discussion between Mr. Bernanke and Sen. Richard Shelby, R-Ala., ranking minority member, during a Senate Banking Committee hearing. The two were discussing systemic risk to the financial system and the role American International Group has played in fermenting the current economic crisis.

"AIG had a financial products division which was very lightly regulated and was a source of a great deal of systemic trouble," Chairman Bernanke told Sen. Shelby, as they discussed what regulators had learned in the wake of the federal government's take over of AIG in September.

"So, I think that we need to have broader-based coverage, more even coverage, more even playing field to make sure that as our system evolves, there aren't markets and products and approaches that get out of the line of vision of the regulators, and that was the problem we had in the last few years," he said.

Chairman Bernanke said that to deal with risks posed to the entire financial system by non-banking entities, federal regulators need legislation that gives the necessary authority.

To deal with it, he said, groups of regulators are working together on proposals to resolve the issue.

"The Congress needs, in my opinion, to set forward a much more elaborate version of the Federal Deposit Insurance Corporation Improvement Act [of 1991] if you like, that would apply to large financial institutions of various types, that would give guidance to regulators under appropriate checks and balances about under what circumstances the regulators could come in and shut down a firm in a safe way that doesn't disrupt the financial markets," Mr. Bernanke said.

He noted that "absent those kinds of powers and that kind of framework, we really are having to play it by ear," adding, "and think about what we need to do to ensure that the system as a whole doesn't get subjected to this kind of broad-based crisis in the future."

In the meantime, Congress is working on legislation that would deal with systemic risk.

On Tuesday, Rep. Steny Hoyer, D-Md., said that the House will vote on legislation dealing with systemic risk in the financial services sector before it leaves for its Easter recess on April 3.

However, Senate action to deal with the financial crisis will likely be delayed as Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, and Sen. Shelby have promised a more deliberate approach to reform.

Special Reports /

Bernanke Says Federal Regulators Lack Power Over Insurers

Related Stories

Recommended For You