NEW YORK (TheStreet) -- Federal Reserve Chairman Ben Bernanke said in testimony Wednesday that he believes the best approach to solving "Too Big to Fail" would be to require banks to hold more capital.
In an exchange with independent Senator Bernie Sanders of Vermont, Bernanke said that the Fed was doing a "lot of things" through the Orderly Liquidation Authority as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to address the issue.
Regulations based on Dodd-Frank aim at making banks safer by requiring them to hold more capital and restricting risk taking activities, while preventing future bailouts.
Still, the market perception that some banks are so big that the government would bail them out in the event of failure, has not gone away. A number of solutions have been proposed to resolve this problem, including mandating caps on the size of banks, increasing capital beyond the levels proposed by Basel III and bringing back Glass-Steagall, a defunct act that prohibited commercial banks from engaging in investment banking activities."Glass-Steagall is not the solution," Bernanke told Sanders, pointing out that both independent investment banks and independent commercial banks failed during the last financial crisis.
Instead, Bernanke said that of all the solutions proposed, requiring big banks to hold more capital was likely the most effective because there is an increasing cost that comes with being large that might automatically force some banks to break up.
Sanders also asked Bernanke if the Fed's policy of paying interest on excess reserves that banks park with the central bank was limiting lending. Bernanke said that banks had no control on the level of excess reserves in the system. He also said the interest rate that the Fed paid was not high enough to prevent banks from lending, as banks could get much higher yields on commercial loans. Another issue that bothers Sanders is the "absurdity" in the Fed's charter that allows people like JPMorgan Chase CEO Jamie Dimon to sit on the board of the Federal Reserve Bank of New York, a clear example of a "Fox guarding the hen house." Under the current structure, all regional reserve banks have a nine-member board of directors. Three of the directors are bankers in their respective districts, known as Class A directors. The remaining six, known as Class B and Class C directors, represent the interests of the public.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV