Bernanke points to ongoing risks to financial system

U.S. Federal Reserve Chairman Ben Bernanke said the central bank is more vigilant than ever, but the system on the whole remains vulnerable to crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates greater scrutiny of the financial system through the creation of the Financial Stability Oversight Council, the Consumer Financial Protection Bureau and through other measures, he said. But he said this noting that, "after all, neither the Federal Reserve nor economists in general predicted the past crisis." Speaking at the 49th Annual Conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago, Bernanke said large banks are not the only companies that pose a threat to the financial system. "Size it not the only factor ... other factors include the firm's interconnectedness with the rest of the financial system, the complexity and opacity of its operations, the nature an extent of its risk-taking ... its reliance on short-term wholesale funding and the extent of its cross-border operations," he said. On the positive side, he said, oversight was no longer limited to banks. The FSOC has the power to identify companies that may pose a systematic threat to the system for whatever reason, size included. He also said the financial markets tend to foster a false sense of security, drawing attention to "the apparent tendency for financial market participants to take greater risks when macro conditions are relatively stable." "Indeed, it may be that prolonged economic stability is a double-edged sword," he said, as it encouraged greater risk-taking behavior.