Ben Bernanke
Tim Sloan  /  AFP - Getty Images file
This new framework of Basel II “will be better able than the current system to adapt over time to innovations in banking and markets,” Bernanke said Monday.
updated 6/12/2006 9:02:35 PM ET 2006-06-13T01:02:35

A sweeping regulatory plan to improve risk management for the country’s largest and most internationally active banks is important to making sure the U.S. financial system remains sound, Federal Reserve Chairman Ben Bernanke said Monday.

Years in the making, the proposal, dubbed Basel II, would instruct such big banks to use complex new risk formulas to determine capital requirements.

This new framework “will be better able than the current system to adapt over time to innovations in banking and markets,” Bernanke said in remarks that focused on the evolution of risk management and banking supervision.

The Fed chief made his remarks before the American Bankers Association’s Stonier Graduate School of Banking at Georgetown University.

The aim of the proposal is to more closely match the risk in big banks’ portfolios with the capital they hold in reserves.

“If the regulatory capital required of these organizations does not adequately reflect the risks they are actually taking, the safety and soundness of the U.S. banking system may be jeopardized,” Bernanke said.

Fielding questions on a range of issues after his speech, Bernanke said regulators in the “not too distant future” will issue final guidance for lenders that offer interest-only and other types of nontraditional mortgages. Lenders and borrowers that hold risky mortgages could get badly jolted if housing prices drop or interest rates rise sharply.

Bernanke said he didn’t want to prejudge Wal-Mart’s bid before the Federal Deposit Insurance Corp. to get into the banking business. However, he raised questions about the broader regulatory issue that allows big companies like Wal-Mart to do this and raised concerns about mixing banking and commerce.

The chairman reiterated his interest in seeing China revamp its currency system. He also said America’s record-high trade deficit could be eased if the United States boosted its own savings and America’s trading partners increased their appetite to buy U.S. goods.

On the banking front, federal regulators will press ahead on the proposal and work with industry to refine it, if necessary, Bernanke suggested.

“Although the Basel II framework provides the basis for modernizing the supervision of large, internationally active banks, I emphasize that it remains in many ways a work in progress,” he said. “Important details remain to be worked out and much work remains to be done by both banks and supervisors to ensure that the system works as intended.”

Bernanke did not discuss the state of the economy or the future course of interest rates in his remarks or during a question and answer session afterward.

Last week, however, Bernanke said rising inflation was unwelcome and made clear the Federal Reserve will take action to snuff it out. Economists took that as a strong signal that interest rates, which have gone up 16 times since June 2004, will go up again at the Fed’s next meeting, June 28-29. Bernanke’s inflation warning sent stocks tumbling.

Bernanke took over the Fed in February, succeeding Alan Greenspan, who ran the central bank for 18 years.

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