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Bernanke talks breaking up banks

By Sheyna Steiner · Bankrate.com
Wednesday, April 25, 2012
Posted: 5 pm ET

At the Fed's FOMC press conference Wednesday, Fed Chairman Ben Bernanke discussed the progress of the too-big-to-fail program, the possibility of breaking up banks and where the FOMC's members see rates heading.

Too big to fail

Bernanke said the Fed was hard at work on taking care of too-big-to-fail banks.

"We are working to get rid of too big to fail and making some progress. We are very substantially increasing supervisory and regulatory oversight of big institutions. The first thing we're going to do is make sure that they are stronger, making it harder for them to fail and (ensuring they are) watched more carefully by supervisors," he said.

In case of failure though, the Dodd-Frank Act gave the Federal Deposit Insurance Corp. orderly liquidation authority over complex financial firms.

"The complexity of firms make this difficult, but (we now have) living wills, which require firms to plan out how they would be disassembled. And we have talked to multinational colleagues about what would happen if a systemically important financial institution had to be put into receivership," Bernanke said.

Too big to break up

When asked if there was an argument to be made for breaking up the banks, Bernanke offered at least one scenario.

If there were "circumstances where a bank or financial institution is artificially large and if it were posing a threat to stability, then breaking it up would be something regulators should look at," the chairman said.

According to his remarks, Bernanke favors a regulatory approach rather than taking a sledgehammer to systemically important financial institutions, or SIFIs.

The way to do it is by eliminating incentives to be too big with greater liquidity requirement and limiting interconnectedness, among others, he said.

"Force firms to internalize costs of being large and complex. If we can safely unwind a SIFI, then we no longer have too big to fail," he said.

Members predict the future

Bernanke also discussed the Summary of Economic Projections, or SEP. This is only the second time that the SEP has featured participants' views on the appropriate timing of a rate increase and the possible path of the federal funds rate over the coming years.

FOMC participants' projections for increase of federal funds rate
FOMC participants' projections for increase of federal funds rate

Source: Federal Reserve.

As expected, some members of the FOMC, or Federal Open Market Committee, have moderated their views on the economic recovery. In January, two FOMC members believed that 2016 would be an appropriate time to begin raising rates.

Today's charts show that those two members have softened their view somewhat, moving that date to 2015. Two other members moved their view from 2015 to 2014.

FOMC projections of federal funds rate over the next several years

FOMC projections of federal funds rate over the next several years

Source: Federal Reserve.

There are obviously a "range of views of when the increase in the fed funds rate will be appropriate," Bernanke said in the press conference. He emphasized the committee would be flexible as circumstances unfold.

We will have "accommodative policy for the foreseeable future. We are willing and able to take further action. Note that forward guidance on the federal funds rate is conditional on data. And if it comes in differently, we would adjust how the outlook evolves," he said.

"Should it strengthen, we would have to respond to that," Bernanke said.

He emphasized that the individual perspectives were inputs to the committee decision-making process on monetary policy and interest rates. There was a near unanimous decision to stand pat at this meeting with only one dissenting vote.

If a little inflation is good …

Though the chairman eluded some questions seeking his personal views on the best time to raise rates, he did tackle an inquiry questioning the committee's target inflation rate of 2 percent.

Specifically, why not let inflation drift up to 3 percent?

"The concern we have is that if inflation ran over 2 percent for a while, the credibility of the Federal Reserve and well-anchored inflation expectations would become eroded and we would have less flexibility to use monetary policy to achieve employment goals," Bernanke said.

According to the chairman, under the best conditions and perfect foresight, the best outcomes using econometric models involve inflation near 2 percent.

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