The new law, enacted in July, toughens government oversight of Wall Street and banks, provides stronger protections for consumers and gives the Fed and other regulators new powers to restrain risky financial practices. It's aimed at preventing another financial crisis like the one that struck with force two years ago and plunged the country into a deep recession.
Bernanke was scheduled to testify at a hearing Thursday by the Senate Banking Committee. Appearing with him are Deputy Treasury Secretary Neal Wolin; Mary Schapiro, chairman of the Securities and Exchange Commission; Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Gary Gensler, chairman of the Commodity Futures Trading Commission.
Their agencies are charged with writing scores of new rules to put meat on the bones of the overhaul law. As sweeping as the law is, Congress left much of the substance of the new rules to the discretion of regulators. The rule writing, just underway, already has drawn intense lobbying from financial industry interests.
Bernanke, Treasury Secretary Timothy Geithner and the other regulators are members of the Financial Stability Oversight Council, a powerful assembly created by the new law. The council is headed by Geithner and is charged with keeping watch over the entire system.
In his testimony prepared for Thursday's hearing, Bernanke said the Federal Reserve is working with the Treasury Department to develop ways for regulators to best detect financial dangers that could damage the economy. And the Fed is helping Treasury identify companies that are so big and so interconnected that their failure could take down the entire financial system. Those companies which are likely to include Wall Street firms, big hedge funds and insurance companies would be subject to tougher regulations.
The law includes a process for shuttering big, complex financial companies using money from investors and loans from Treasury.
At the same time, the Fed is transferring many of its consumer protection responsibilities to a new watchdog agency created by the law. The Bureau of Consumer Financial Protection is housed within the Fed and bankrolled by the Fed, but Bernanke has no authority over it.
All told, the Fed has identified 250 projects associated with the law. A new position was created to coordinate all those projects, Bernanke said. To be more open, the Fed will post information on its website about its communications with banks, trade associations, academics, consumer groups and others regarding the writing of new rules under the law.