WASHINGTON – Tougher regulations may mean less profit for banks. But Ben Bernanke says that’s a fair price to pay after the damage caused by the 2008 financial crisis.
The Federal Reserve chairman told lawmakers Thursday that the crisis led to “an enormous waste of resources” and new rules proposed by the Fed and other regulators to safeguard the financial system are “well-justified on a cost-benefit basis.”
“Unsafe practices by large financial institutions pose a risk not just to themselves but to the rest of society,” Bernanke told the Senate Banking Committee. “In setting policy we should look at the social cost and not just the cost to the firms.”
Bernanke made the comments during his second appearance before Congress this week. He was presenting the Fed’s semiannual economic report, perhaps his last as chairman. Many speculate he will not seek another term when his second four-year term ends in January.
Much of the hearing focused on the Fed’s efforts to boost the economy. On that topic, Bernanke stuck with the message he delivered to the House Financial Services Committee on Wednesday, saying any change in the Fed’s low interest rate policies will depend on the job market’s health and inflation.
But lawmakers also pressed him on rules that the Fed and other regulators are mulling in response to the worst financial crisis since the Great Depression.
The crisis triggered a recession that put millions of Americans out of work, pushed the unemployment rate to 10 percent, sent home values plummeting and edged millions of Americans toward foreclosure.
The economy is still struggling four years after the recession officially ended. Growth remains tepid. Wages are barely keeping pace with inflation. And unemployment is a still-high 7.6 percent.
The banks argue that requirements to hold larger capital reserves and higher ratios of equity to loans can constrain them from lending. They also say such rules could put U.S. banks at disadvantage against their competitors in other countries.
But lawmakers appeared less sympathetic to such complaints, particularly after seeing big second-quarter profits reported this month by Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo.
“It’s no surprise that mega-banks are doing quite well, yet they continue to claim that … regulations are killing them,” said Sen. Sherrod Brown, D-Ohio.
Brown asked Bernanke if smaller bonuses and fewer dividends are a fair price to pay for a safer financial system.
Bernanke said the first concern should be how those regulations affect lending. But he agreed that banks could handle the costs.
“Given the enormous cost of the crisis … strong measures to prevent (a) repeat are obviously well-justified on a cost-benefit basis,” he said.
Starting next year, banks must maintain a buffer of high-quality capital equal to 4.5 percent of their loans and other assets, under rules adopted this month by the Fed. That’s up from a 4 percent requirement for capital that’s not restricted to high-quality capital, such as bank stock or earnings retained by the bank.
And the Fed this month proposed that the eight largest U.S. banks hold equity equal to at least 5 percent of their total loans and assets. That’s up from 3 percent. The rule could be finalized before the year ends.
Bernanke repeated his position that there is no “preset course” for the Fed’s $85 billion-a-month bond-buying program. Any change will depend on the economy’s performance.
And he said that the Fed could hold its benchmark short-term interest rate near zero even after unemployment falls below 6.5 percent.
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