Bernanke: US Must Resolve 'Too Big to Fail' Problem

Ben Bernanke

Federal Reserve Chairman Ben Bernanke said Friday that small banks were understandably angry about Wall Street bailouts, and called for a better way of allowing huge financial firms to fail.

Bernanke said he saw no "realistic alternative" to preventing the disorderly collapse of large companies, and reiterated that the economy cannot fully recover unless some reasonable degree of financial stability is restored.

"Many of you likely are frustrated, and rightfully so, by the impact that the financial crisis and economic downturn has had on your banks, as well as on the reputation of bankers more generally," Bernanke said in a speech to a community bankers convention.

"You may well have built your reputations and institutions through responsible lending and community-focused operations, but nonetheless, you now find yourselves facing higher deposit insurance assessments and increasing public skepticism about the behavior of bankers— outcomes you perceive were largely caused by the actions of larger financial institutions."

Bernanke and other US officials are grappling with public backlash over expensive financial rescues. Hefty bonuses paid to bailout recipient American International Group have stoked that outrage.

He said policy-makers needed a safer way to shut down large nonbank financial firms without destabilizing the entire economy.

While there is a mechanism for winding down insured depository institutions, "it is clear we need something similar for systemically important nonbank financial entities."

"Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating," he said.

The speech, two days after the central bank completed its latest monetary policy meeting, offered scant fresh insight into Bernanke's thinking on policy.

The Fed has made it clear it intends to keep short-term borrowing costs near zero for an extended period as the economy struggles to emerge from a deep recession.

Bernanke divided the Fed's crisis-fighting efforts into three categories: providing short-term liquidity to sound financial institutions; lending directly to borrowers and investors in key credit markets, and buying longer-term securities.

He said the central bank has "generally been encouraged" by the market response to its myriad of lending programs.

If a newly launched program called the Term Asset-Backed Securities Loan Facility—or TALF— works as planned, it should ease credit constraints on consumer, business and mortgage loans, he said.

The central bank announced Wednesday it would buy up to $300 billion in Treasury debt. It also said it would increase its purchases of government-sponsored mortgage finance company debt to up to $200 billion, and increase purchases of mortgage-back securities to as much as $1.25 trillion.

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