Bernanke Seeks Expanded Fed Powers

Federal Reserve Bank Chairman Bernanke is looking for more regulatory powers for the Fed.

Federal Reserve Chairman Ben Bernanke said Tuesday that the Fed should have additional powers to prevent and limit financial market turmoil.

Congress should consider giving the Fed power to set standards for capital liquidity holdings and risk management for investment banks, Bernanke said.

In the past, the Securities and Exchange Commission has been the primary regulator of broker dealers.

In addition, Congress might give the Fed broad power to promote financial market stability, Bernanke said.

I am in favor of this suggestion by Bernanke. Over the years, the financial markets have changed, become more complex and the lines between banks (traditionally the regulatory jurisdiction of the Fed) and broker/dealers (traditionally the regulatory jurisdiction of the SEC) have become blurred. I believe that the oversight arms need to be updated to keep pace.

And just recently, the Fed did make some creative moves to provide some liquidity to the brokerage house sector:

Bernanke said the Fed is considering extending its emergency loans to broker-dealers beyond 2008.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end," he said.

In March, as market conditions worsened, the Fed established two lending facilities for brokerages. One allows them to swap a range of illiquid assets for Treasury securities. The other facility provides cash to broker dealers in a system that is similar to its discount window for banks.

I would expect to see the SEC eventually become an arm of the Federal Reserve Bank. Very clearly, their activities need to be coordinated.