I just noted Federal Reserve Chairman Ben Bernanke's testimony before the House Financial Services Committee dealing with systemic risk regulation. In his testimony, he also addressed another topic that I've been writing about quite a bit lately: a non-bank resolution authority. Such an agency would work to wind down large financial institutions, much like the Federal Deposit Insurance Corporation does for banks. If such an authority exists, the government will not need to bail out firms that appear too big to fail. I was pleased to hear that Bernanke favors the creation of this new authority.
Bernanke asserts that the creation of such a resolution authority would have the following implication:
The availability of a workable resolution regime also would replace the need for the Federal Reserve to use its emergency lending authority under section 13(3) of the Federal Reserve Act to prevent the failure of specific institutions.
I think that's true. But it's fascinating that Bernanke would state this. He's saying that if the U.S. had this new resolution authority, the Federal Reserve would not need its emergency lending function. That's currently a very important power of the Fed. I'm impressed to hear the Federal Reserve chairman concede that power before a Congressional committee. Of course, it may come back to haunt him, as Congress has the chairman's own words as a basis for taking that power away if a resolution authority is put into place.