Chairman Ben Bernanke said Tuesday that regulators should look beyond repairing only the mortgage market and consider ways to make the overall U.S. financial system itself more stable.
Speaking at a Federal Deposit Insurance Corporation conference in Virginia, Bernanke said instability in the system since last year "has importantly affected the availability and terms of credit and the pace of economic growth." (
to read the entire speech.)
To address the situation, regulators shouldn't focus exclusively on mortgages, but instead would be wise to examine the wider financial marketplace "without compromising the dynamism and innovation that has been its hallmark."
Bernanke noted that some steps have already been taken, including by the President's Working Group in the U.S. and at the international Financial Stability Forum, which have produced reports on the credit crisis and provided recommendations for regulators and the private sector.
Many of the suggestions are being implemented, he said, including closer regulation of mortgage lending, strengthening of regulatory capital, liquidity-management requirements for banks and reforms of the credit-rating agencies.
"The recent experience, including the broader turmoil we have seen in the financial markets, will have -- indeed, is already having -- important consequences for U.S. regulatory policy," Bernanke said.
Next week, the Federal Reserve Board plans to issue new rules on mortgage lending, which will apply to all lenders and are meant to address some of the problems that have surfaced in recent years in mortgage loans, especially those with high interest rates.
"The Federal Reserve, together with other regulators and the private sector, is engaged in a broad effort to strengthen the financial infrastructure," the Fed chief said. "In doing so, we aim not only to help make the financial system better able to withstand future shocks but also -- by reducing the range of circumstances in which systemic stability concerns might prompt government intervention -- to mitigate moral hazard and the problem of 'too big to fail.'"
Bernanke also discussed the Fed's role in the takeover by
of Bear Stearns.
"Our analyses persuaded us and our colleagues at the
Securities and Exchange Commission
and the Treasury that allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy," he said.
Had Bear fallen apart, the collapse could have "seriously disrupted certain key secured funding markets and derivatives markets and possibly would have led to runs on other financial firms," he continued.
Additionally, he said, the Fed is considering extending its lending facilities for primary dealers beyond the end of the year.
This article was written by a staff member of TheStreet.com.