Bernanke May Resist ‘Noah’s Ark’ Approach on Systemic Risk
By Ian Katz and Rebecca Christie
Republican lawmakers and industry lobbyists are pressing a council of regulators including Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner to reject a so-called Noah’s Ark strategy in choosing which non-bank companies to put under Fed supervision. Under the Dodd-Frank Act, the Financial Stability Oversight Council must designate companies whose failure would threaten economic stability. The Fed could require the firms to raise capital and reduce risky practices. They also would have to file “living wills” so they could be unwound in an orderly way. A Noah’s Ark strategy would apply the systemically risky label to two or more of the largest players in each category of finance — including insurance, hedge funds and money managers.
Though the council has given little indication of its direction, members may be divided. Bernanke said in March he favors choosing a “handful” of firms while Federal Deposit Insurance Corp. Chairman Sheila Bair said in February she would “err on the side of inclusiveness” when it comes to living wills. “The political advantage of the Noah’s Ark approach is it protects you from being accused of discriminating against any one sector,” said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., whose clients include the FDIC and Wells Fargo & Co. “And if you pick the largest players in a sector you send a warning signal.”