September 30th, 2010 
davidguide Washington, D.C., United States (AHN) – A new federal law to prevent major banks from disrupting the nation’s economy shows early signs that it is restoring the confidence of investors, according to witnesses at a Senate hearing Thursday.
The heads of financial regulatory agencies testified on progress of the Dodd-Frank Act on Financial Regulations, which President Barack Obama signed into law July 21.
“We’re certainly seeing movement in the right direction,” Federal Reserve Bank Chairman Ben Bernanke told the Senate Banking Committee.
The new law takes away some discretion of investment banks on how they invest their own and customers’ money. It also gives the government the right to take over a financial institution’s operations when it is close to a business collapse that could hurt the nation’s economy.
The law fulfills Obama’s pledge that he would not allow any more businesses to depend on government bailouts to save them when they make bad decisions.
Bernanke said some banks that halted their investments in new business during the recession that started in December 2007 are starting to re-invest.
However, they are timid after suffering severe losses.
“Given the fact we just came through a crisis, banks are not taking risks,” Bernanke said.
The financial crisis started largely as a result of banks loosening credit terms for home buyers to increase their revenue from mortgage payments.
As homeowners defaulted on the loans, bank failures caused $1.8 trillion in financial losses internationally.
The crisis also prompted the federal government to provide huge financial bailouts to companies such as investment firm Bear Stearns Cos. and insurance giant American International Group Inc.
Bernanke said the biggest challenge facing government regulators is ensuring they work under a single set of policies for the entire financial industry.
He has said previously the government focused its regulations on large public banks but overlooked the damage that could be caused by private investment companies.
The Dodd-Frank Act broadens government oversight of the financial industry to include private investment firms.
The Federal Reserve is writing 50 new regulations and working on 250 projects to comply with the new financial reform law.
“Given all these overlapping responsibilities, I think coordination will be extremely important,” Bernanke said.
The Federal Reserve plans to hand over some of its authority to a new Bureau of Consumer Financial Protection, which will ensure there will be no more banks that are what Obama called “too big to fail” without government bailouts.
“Work is well under way to transfer … responsibilities,” Bernanke said.
The Federal Reserve is scheduled to update Congress with more detail on how well financial bailouts helped restore the nation’s economy in a report due Dec. 1.
Other witnesses agreed that managing new responsibilities in the Dodd-Frank Act are their greatest challenge.
“We’re all sort of learning a new thing here,” said Gary Gensler, chairman of the Commodities Future Trading Commission.
Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, urged the agency chairmen to be careful in their decisions.
“You’ll set the tone for years to come,” he said.
Among projects of the regulatory agencies is the development of new economic models for predicting financial collapses. The old models failed to predict the housing bubble that led to the recession, according to economists.
“I think the key challenge over time is going to be how to assess system risks,” said John Walsh, the Treasury Department’s acting comptroller of the currency.
View full post on All Stories
Posted in Uncategorized 
Tags: 
