Fed Chairman & Bank Regulations

Stephen DeAngelis

October 25, 2006

Federal Reserve Board Chairman, Ben Bernanke, has weighed in on the side of those interested in reducing regulatory burdens for U.S banks. Bernanke made his views known in prepared remarks before two sympathic audiences [“Bernanke Frets About Bank Regulations,” Martin Crutsinger (AP), Washington Post, 16 October 2006].

“Deterring and identifying misuse of the financial system, as important as that is, should not be so onerous that it stifles innovation … or reduces the international competitiveness of U.S. banks,” Bernanke said in remarks prepared for the annual conventions of two banking groups [American Bankers Association in Phoenix and America’s Community Bankers in San Diego]. He said the central bank was determined to work to streamline the reporting processes required by the Bank Secrecy Act “without diminishing the value to law enforcement of the information produced.”

Last month I wrote a post about another group who also believes that regulations are onerous and adversely affecting U.S. companies [U.S. Business Regulations to be Examined]. That post discussed an article by Steven Pearlstein who insisted that it was not regulations that were making U.S. businesses uncompetitive. Bernanke specifically dealt with two regulations the Bank Security Act and the Community Reinvestment Act.

“We are ever mindful that banks and their customers bear a large share of the costs of regulation,” Bernanke said. “Minimizing the regulatory burden on banks is very important.” … Bernanke said it was important for the banking industry to have the opportunity to get feedback from regulators on the usefulness of their reports on suspicious activity as well as guidance on ways to better identify the most significant risks. “Efforts to further increase feedback would help banks allocate their compliance resources more efficiently while complying with the act and preventing misuse of the financial system,” Bernanke said. He said it was also important for banks to have effective channels to voice their concerns about burdens imposed by the secrecy law or the lack of clarity in the regulations they are supposed to enforce. Bernanke said the Fed was also exploring ways to reduce regulatory burdens in the implementation of new rules on capital requirements and in the Community Reinvestment Act, which seeks to boost lending in poor neighborhoods.

By focusing on feedback, Bernanke is on the right track. No one can assert that eliminating money laundering and terrorist financing are bad things, but without feedback banks can’t know that whether what they report is actually being used to good effect. Feedback loops are critical for making any system resilient.