Fed Chief Says U.S. Bolstered Its Ability to Handle Failure of a Big Bank

By EDWARD WYATT

WASHINGTON — The chairman of the Federal Reserve said on Thursday that banking regulators would be better able to deal with the failure of a large bank today than they were two years ago, thanks in part to the Dodd-Frank Act, which overhauled financial regulation after the crisis of 2007-8.

Ben S. Bernanke, the Fed chairman, told the Senate Banking Committee that it would be some time before all of the rules of the new law were in place but that regulators had begun to tighten risk standards and “certainly we’ve all learned lessons from the crisis.”

When Senator Richard C. Shelby of Alabama, the ranking Republican on the committee, asked what those lessons were, Mr. Bernanke replied, “The importance of being very aggressive and not being willing to allow banks, you know, too much leeway, particularly when they’re inadequate in areas like risk management.”

Mr. Bernanke’s comments came as he and other chief regulators sparred with lawmakers over whether new regulations would cost businesses and consumers too much, and whether they would adequately protect against another financial crisis.

The chairmen of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission and the acting comptroller of the currency explained how their agencies were writing and carrying out hundreds of rules and regulations that were required by the law, which was signed in July.

“In 2008, the financial system failed the American public, but the regulatory system, as well, failed the American public,” Gary Gensler, the chairman of the commodities commission, told the committee. The commodities group and the S.E.C. combined have proposed 64 new rules that would affect parts of the financial markets and have issued eight final rules and four interim rules. But officials have said they will be hard pressed to meet all of the Dodd-Frank deadlines for new regulation.

Several senators focused on a Fed proposal that would require debit card issuers to cut by as much as 90 percent the fees charged to merchants for individual purchases.

The Federal Reserve has proposed rules that would exempt smaller banks, which depend more on the fees to maintain profitability, from having to lower their fees. But Mr. Bernanke and Sheila C. Bair, chairwoman of the F.D.I.C., said a two-tiered system might not work.

“It is possible that the exemption will not be effective in the marketplace,” Mr. Bernanke said, because merchants may not accept debit cards from smaller institutions if they have to pay higher fees to do so. In addition, the debit card transaction networks may be unwilling to set up systems that recognize two different fee rates.

Over all, however, Mr. Bernanke said, the lower charges, known as interchange fees, would reduce the costs of debit transactions. Some of the savings could be passed on to customers, he said.

Some members of both houses of Congress and on both sides of the aisle have taken aim at the interchange rule, a section of the Dodd-Frank Act often referred to as the Durbin amendment after its sponsor, Senator Dick Durbin, an Illinois Democrat.

At a House Financial Services Committee hearing on Thursday, as well as at the Senate Banking Committee meeting, lawmakers asked the banking regulators whether the provision should be delayed — something that Congress would have to mandate.

At the House hearing, Sarah Bloom Raskin, a member of the Fed’s board of governors, put the ball back in Congress’s court. “We would most definitely defer to Congress’s desire,” she said.

In the Senate hearing, Ms. Bair was noncommittal on the question. “There are legitimate policy arguments on both sides of this,” she said. “But it was done very quickly. I think the full policy ramifications, who’s paying for what, who’s going to pay more and who’s going to pay less under this is something that maybe wasn’t dealt with as thoroughly as it might have been.”

John Walsh, the acting comptroller of the currency, asked senators to consider revising part of the law that limits the use of credit ratings to determine whether a financial institution can hold an investment.

“We recognize that the misuse of credit ratings, especially in structured finance, contributed importantly to the financial crisis,” Mr. Walsh said. “But this was not true of corporate and municipal ratings. And after significant study and comment, we have found no practical alternative for such ratings that could be used across the banking sector.”

While not advocating a return to “a total reliance” on credit ratings, “their use within defined limits is essential for implementation of capital rules,” he said.

Mr. Walsh also said that regulators were considering civil enforcement actions against some home mortgage servicing companies that had “critical deficiencies and shortcomings” in the ways they handled foreclosures.

Most of the servicers examined last year were complying with the rules, he said. But regulators are preparing changes to address identified problems, he said, including “appropriate remedies for customers who have been financially harmed.”

Several Democrats took time to point out to colleagues that the S.E.C. and the commodities futures group were facing budget squeezes that had led to cutbacks in technology spending, hiring and travel for enforcement action.

Things will get worse once the Dodd-Frank regulations are in place and new enforcement and oversight responsibilities are due, Mary L. Schapiro, chairwoman of the S.E.C., said. “We don’t have the capacity now to take on the examination of hedge funds, for example,” she said, or to oversee registration and regulation of portions of the swaps market.

Mr. Gensler echoed that assessment. “I know this nation of ours has a great budget deficit that we all have to come together and understand better and grapple with,” he said. “It’s daunting to ask for more money for this agency at this time. But I really do think this is a good investment for the American public to avoid crises like in 2008.”

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