Federal Reserve Chairman Ben Bernanke today said that some financial institutions seen as too big to fail should face more oversight from the federal government.
Firms whose failure would pose a systemic risk must receive especially close supervisory oversight and be held to the highest prudential standards, Mr. Bernanke said in prepared remarks to a group of community bankers in Phoenix.
Particularly close attention should be paid to the compensation practices of financial institutions that can create mismatches between the rewards and risks borne by institutions or their managers, Mr. Bernanke said. Management compensation policies should be aligned with the long-term prudential interests of the institution, be tied to the risks being borne by the organization, provide appropriate incentives for safe and sound behavior, and avoid short-term payments for transactions with long-term horizons.
Mr. Bernanke also said federal policymakers should consider modifying existing capital rules and accounting standards to try to reduce their potential to add to the problem when the economy is in a downturn.
Determining the appropriate valuation of illiquid or idiosyncratic assets can be very challenging, especially in highly strained market conditions, he said.