BUSINESS
02/18/2011 01:57 pm ET Updated May 25, 2011

Bernanke: Regulators Can Handle 'Too Big To Fail' Banks

Fed chairman Ben Bernanke said on Thursday that regulators could now handle the collapse of a "too big to fail" bank. The next day, presenting a new research paper, Bernanke argued that foreign investors helped fuelled the financial crisis.

Speaking at a meeting of the Senate Banking Committee on Thursday, Bernanke said new regulations created under the Dodd-Frank financial reform bill passed last year, would take time to implement, but that regulation had improved. (Scroll down for video.)

"We've all learned lessons from the crisis," Bernanke told the committee, according to published testimony.

"What have you learned," asked Senator Richard Shelby (R- Ala.) ranking republican on the Senate Banking Committee.

"The importance of being very aggressive and not being willing to allow banks too much leeway particularly when they're inadequate in areas like risk management where it turned out to be such an important problem during the crisis," Bernanke responded.

"We've done a lot to strengthen out supervision on a day to day basis," Bernanke added.

Later on Thursday, speaking in Paris ahead of the G20 series of meetings between the finance ministers and central bankers of the world's 20 leading economies, Bernanke suggested foreign investors' desire for American securities exacerbated the financial crisis. (Scroll down for document.)

In the rush to buy American assets, Bernanke said in the Paris speech, foreign investors pushed banks to turn risky mortgages into bonds rated as safe, and ultimately helped cause the financial crisis between 2007 and 2009.

In the speech presenting a new research paper written with other Fed economists, Bernanke said:

"The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy."

The Federal Reserve chairman said that the housing bubble, and its attendant regulatory failures however, were all-American.

According to the Financial Times:

Bernanke has previously argued that a "global savings glut" led emerging markets to send large amounts of capital to the US in the 2000s, pushing down US interest rates. His new paper says that those emerging markets wanted safe assets - and US regulators failed to keep the financial system from creating them.

Speaking in Paris ahead of the G20 on Friday, Bernanke also said countries with large trade surpluses should let their currencies increase in value, instead of keeping their currencies artificially low, likely a veiled reference to China's policy of keeping the yuan low.

"The maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable," Bernanke said, at the Paris event.

The G20 meeting is taking place in Paris this weekend. The last meeting, in Korea in November, happened just after the Fed announced it's $600 billion plan to help lift markets. The move, derided as "printing money" sparked criticism from foreign officials.

Global Imbalances: Links to Economic and Financial Stability, Remarks by Ben Bernanke Chairman Board of Governors of the Federal Reserve System at the Banque de France

The full text of Ben Bernanke's G20 speech on global imbalances is also available here.
A full video of the Senate Banking Committee meeting is online here.