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Chairman Ben Bernanke said Monday that the Federal Reserve is working to address the regulatory failures that were exposed by the 2008 financial crisis. But he cautioned that as the financial system evolves, new risks will emerge.
The Fed has overhauled its regulatory efforts to focus much more on the stability of the entire financial system, Bernanke said. It seeks to avoid mistakes of the past crisis, such as big non-bank institutions escaping the supervision.
But the Fed chief said it was not enough for regulators to just address problems exposed by the crisis. The financial system is constantly evolving and unanticipated future risks to stability will develop, he said.
Bernanke's comments came in a speech Monday night to a conference sponsored by the Federal Reserve Bank of Atlanta.
The financial crisis, which hit with force in the fall of 2008 after the collapse of Lehman Brothers, underscored the need for regulators to do a better job in policing the financial system, he said.
"About three and a half years have passed since the darkest days of the financial crisis, but our economy is still far from having fully recovered from its effects," Bernanke said in his remarks.
In terms of closer supervision, Bernanke noted that the central bank last month released the results of stringent stress tests in which all but four of 19 major U.S. financial institutions got passing grades. The Fed declared the institutions strong enough to survive an economic downturn worse than the Great Recession.
In another example of stepped up supervision, Bernanke said that the Fed has been actively monitoring U.S. banks' direct and indirect exposures to the European debt crisis. It is also tracking the way U.S. banks are managing their exposure to the risks posed by the European crisis.
Bernanke said that the Fed and other banking regulators are moving to impose tougher standards, not just on big banks but on big non-financial institutions such as insurance companies. The aim is to better regulate all financial institutions that could pose a risk to the stability of the financial system.
"But even as we make progress on known vulnerabilities, we must be mindful that our financial system is constantly evolving and that unanticipated risks will develop over time," Bernanke said.
He said that was an unavoidable consequence of the new financial regulations put into place by the sweeping Dodd-Frank Act that Congress passed in 2010 to overhaul the financial regulatory system.
"An inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas, increasing the need for careful monitoring and supervision of the system as a whole," he said.
Bernanke said that the Fed has increased its efforts at system-wide monitoring with the creation of an Office of Financial Stability Policy and Research.