Avoid bailout of financial firms, says Bernanke

Source:Bloomberg /  March 21, 2010, 0:17 IST

Federal Reserve Chairman Ben S Bernanke said government
bailouts of large financial firms were “unconscionable” and must
be ended as part of a regulatory overhaul following the worst
financial crisis since the 1930s.

“It is unconscionable that the fate of the world economy should
be so closely tied to the fortunes of a relatively small number of giant
financial firms,” Bernanke said today in a speech in Orlando, Florida.
“If we achieve nothing else in the wake of the crisis, we must ensure
that we never again face such a situation.” 

Congress is considering a resolution mechanism for financial firms
that are so large or interconnected to other institutions that their failure
could damage the financial system. A plan by Senate Banking Committee
Chairman Christopher Dodd, a Connecticut Democrat, would allow
the Federal Deposit Insurance Corp to liquidate a large firm after a panel
of bankruptcy judges determines the company is insolvent and with approval
of the Fed, FDIC and the Treasury Department.

The Fed chairman has faced criticism from Congress for bailouts
that he said were intended to prevent a possible depression.
Lawmakers including Dodd have criticized the Fed’s purchase of $29 billion
of securities in March 2008 to facilitate the merger of Bear Stearns Cos
with JPMorgan Chase & Co, and loans to keep American International Group
Inc from default. 



All large financial firms rather than just big banks should be subject
to stronger regulation, Bernanke told bankers gathered for the
Independent Community Bankers of America convention.
Shareholders and creditors should not be protected from losses
in any plan, he said.

The Fed is revamping its approach to supervision of large banks,
using economists and quantitative analysts to help with horizontal
reviews targeting risks across the financial system, Bernanke said.




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