Testifying at a House hearing, Bernanke waged a fresh battle against Senate efforts to scale back the Fed's role in overseeing the nation's banks.
The Fed boss argued that policymakers factor information they get from the Fed's role as bank regulator into their decisions on interest rates. And Bernanke said its banking duties give the Fed insights into the health of the entire banking system.
"The insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability," Bernanke told the House Financial Services Committee.
Bernanke's testimony comes as the Fed faces a significant shift in its supervisory duties.
In an effort to overhaul the nation's financial regulatory structure, Senate Banking Committee Chairman Christopher Dodd, D-Conn., has offered legislation that would strip the Fed of its power to supervise state-chartered banks and bank holding companies with assets of less than $50 billion.
That would leave the Fed with 35 of the biggest bank holding companies under its supervision.
Critics blame lax regulation at the Fed and at other agencies for contributing to the financial and economic crises. Bernanke once again acknowledged deficiencies, and he said the Fed is taking steps to beef up oversight.
"Frankly, the Fed's performance ... has been inadequate," said Rep. Spencer Bachus of Alabama, the senior Republican on the House panel. "In spite of its oversight, many of the large, complex banking organizations excessively leveraged and engaged in off-balance sheet transactions that helped precipitate the financial crisis," he said.
The Fed oversees about 5,000 bank holding companies, about 850 smaller banks that are state-chartered and are members of the Federal Reserve system and some foreign banks operating in the United States.
Dodd's bill, however, also would give the Fed new powers to oversee nonbank financial firms that are so large and interconnected that their failure could pose a risk to the economy.
Such firms could include insurance giant American International Group Inc. or General Electric Co.'s GE Capital business.
Bernanke said the Fed is "quite concerned" about losing oversight of small banks and essentially becoming the "too big to fail regulator" under the Dodd bill.
"We want connections to Main Street as well as Wall Street," Bernanke said.
With its narrower authority, the Fed's system of 12 regional banks could face profound changes. The Kansas City Federal Reserve Bank and the St. Louis Federal Reserve Bank, for instance, would have no banks under their supervision.
The Obama administration has supported a broader supervisory role for the Fed. Legislation passed by the House overhauling the regulatory landscape doesn't trim the Fed's banking duties.
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