Ben Bernanke, chairman of the Federal Reserve, signaled his support for legislation that would give financial regulators authority to shrink companies or force them to divest if they pose a risk to the market or broader economy. "The supervisors should be allowed by law to insist that the company divest itself or shrink its activities," Bernanke said. He also voiced concern about reinstating the Glass-Steagall Act, which was repealed in 1999. The law split investment banking activities from retail-banking operations.
Federal Reserve Chairman Ben Bernanke warned in a somber assessment that the nation's economic recovery will gather strength slowly because of the "headwinds" provided by commercial real estate's deepening problems, feeble bank lending to businesses and persistent high unemployment. "Some important headwinds -- in particular constrained bank lending and a weak job market -- likely will prevent the expansion from being as robust as we would hope," he told a gathering of Wall Street executives, economists and traders.
Former Federal Reserve Chairman Paul Volcker, a White House economic adviser, said a proposal that would give banking supervisors power to sidestep accounting rules is "a terrible idea." Volcker, who has been a critic of mark-to-market accounting rules, said he is concerned that politics might be compromising the independence of accounting standards setters. Volcker's comments come as a House committee is poised to vote on the proposal.
The deepening downturn of the commercial real estate business is a greater threat for midsize regional banks and smaller local banks than it is to the nation's biggest banks, Fitch Ratings said. Credit rating downgrades are likely to be much more common for the smaller banks than the big ones, the ratings agency said. "Loan losses are increasingly likely given the expectations for ongoing declines in commercial real estate markets," said Thomas Abruzzo, a managing director with Fitch.