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Bernanke warns that regulators must avoid burdensome rules when enacting financial reform

May 5, 2011 |  9:06 am

Bernanke Chicago Federal Reserve Board Chairman Ben S. Bernanke said that regulators need to avoid "ineffective or burdensome rules" as they implement the sweeping financial reform law passed last year.

In a speech at a Fed conference in Chicago on Thursday, Bernanke said broad new oversight of the financial system required under the law is already underway. As Fed chief, Bernanke is part of the new Financial Stability Oversight Council, which regularly convenes top government regulators to monitor the economy for signs of risk.

But he warned against regulators going overboard in reaction to the severe financial crisis that struck in 2008 and "stifling reasonable risk-taking and innovation in financial markets."

"Understandably, given the damage wrought by the crisis, the council and its members remain focused on addressing possible sources of financial instability, including both structural problems and risks arising from ongoing economic or financial developments," he said at the Federal Reserve Bank of Chicago's annual Bank Structure and Competition conference. "However, no one's interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit."

The increased coordination of financial regulators required under the law "should serve not only to improve our management of systemic risk, but also reduce the extent of duplicative, inconsistent or ineffective rule makings."

Bernanke gave no indication that he thought regulators had overreached so far in starting to implement hundreds of new financial rules required under the so-called Dodd-Frank act. But his comments came as business groups have complained about overly burdensome government regulations and House Republicans have pushed to slow the rule-writing process.

The Fed serves as a key government regulator of large banks. The law expanded its authority to include supervision of large nonbank financial firms that could pose a risk to the economy. But in passing the law, Congress also stressed the need for financial regulators to look beyond the health of individual banks and other firms to try to head off broad threats to the economy, such as the widespread increase in risk-taking that led to the financial crisis.

Bernanke said that new broader view of financial regulation was "a major innovation" in the United States and abroad designed "to minimize the risk of financial disruptions that are sufficiently severe to inflict significant damage on the broader economy."

 -- Jim Puzzanghera

Photo: Federal Reserve Chairman Ben S. Bernanke speaking at a Fed conference in Chicago. Credit: Getty Images.