Bernanke: ‘Too big to fail’ remains a problem

Federal Reserve Chairman Ben Bernanke said Wednesday that he still views “too big to fail” banks as a “major issue” that must be addressed.

Bernanke told reporters that the lingering concern about whether the nation’s biggest financial institutions are perceived as enjoying a government lifeline is still a challenge for regulators. He added that while new tools created by the Dodd-Frank financial reform law are aimed at addressing the issue, further action may be needed to put the matter fully to bed.

“I don’t think ‘too big to fail’ is solved now. We’re doing a number of things which I think will help,” he said. “If we don’t achieve the goal, I think we’ll have to do additional steps … it’s not just something we can forget about.”

{mosads}Bernanke and other regulators have been pressed by lawmakers in both parties about whether big banks still enjoy the implicit backing of the U.S. government since the financial crisis. And while regulators and Dodd-Frank backers insist the law provides the tools to prevent future bailouts, Bernanke acknowledged that the perception has persisted to some degree.

“Too big to fail was a major source of the crisis, and we will not have successfully responded to the crisis if we do not address that issue successfully,” he said.

He also told reporters that he had discussed his future at the Fed “a bit” with President Obama, but offered no insight into his plans. Bernanke is completing his second term as Fed chairman after Obama re-nominated him for the position in 2010. His term is set to expire at the beginning of 2014.

Bernanke is reportedly not interested in serving a third term at the Fed’s helm, and emphasized that the Fed is deeply staffed with capable individuals.

“I don’t think that I’m the only person in the world who can manage the exit,” he said. “There’s no single person who is essential to that.”

Bernanke’s remarks came after the Fed announced that it was maintaining its existing, extremely accommodative policy in the face of a slowly improving economy.

In a new statement, the Federal Open Market Committee (FOMC) said it appeared the economy had returned to moderate growth after suffering a brief pause in improvement at the end of 2012. While there have been “signs of improvement” in the labor market, an elevated unemployment rate is still bolstering the case for the Fed to stay the course with its existing policy, it added.

By maintaining existing policy, the Fed renewed its commitment to a policy of near-zero interest rates, with an additional $85 billion in bond purchases a month, in an effort to further lower long-term borrowing rates and spur on the economy.

But Bernanke suggested after the statement was released that the Fed may begin to taper off those purchases as the economy gains strength, rather than shut them off outright.

He said simply turning off that support would be “very difficult for markets to understand,” indicating a more gradual approach will be how the Fed plans to make its exit.

“When we see the situation has changed in a meaningful way, then we may well adjust the pace of purchases,” he said, adding that there could be a “considerable interval” between when the Fed stops buying bonds and when it begins looking to sell them.

Bernanke told reporters that recent fiscal restraint from the federal government, including the “fiscal cliff” agreement and the automatic sequester cuts, is taking its toll on the economy, and that the Fed is unable to fully offset any immediate harm.

“We take as given what the fiscal authorities are doing. The economy is weaker, job creation is slower than it would be otherwise,” he said. “Monetary policy cannot offset a fiscal restraint of that magnitude and so the final outcome will be worse in terms of jobs.”

In economic projections released alongside the new statement, Fed officials predicted the economy would grow between 2.3 and 2.8 percent in 2013, before picking up steam in 2014 to 2.9 to 3.4 percent. However, both of those estimates are down slightly from the Fed’s last projections in December.

On the jobs front, the Fed anticipates the jobless rate will decline slightly more in 2013, falling to 7.3 to 7.5 percent. However, it anticipates the jobless rate would fall much more substantially in the coming years, dropping below 7 percent in 2014 and falling perhaps even to 6 percent in 2015.

The Fed had previously announced that it anticipated it would keep interest rates near zero until unemployment dipped below 6.5 percent, assuming inflation remains in check.

Central bank officials anticipate inflation will remain within its targeted range for the foreseeable future, bumping up against its 2 percent threshold potentially in 2014 or 2015.

Eleven members of the FOMC voted in favor of the policy decision, while Esther George, president of the Federal Reserve Bank of Kansas City, was the lone dissenter.