Ben BernankeFederal Reserve Chairman Ben Bernanke and presidential economic adviser Paul Volcker urged congressional lawmakers not to strip the central bank of key oversight functions as part of a wider regulatory overhaul, arguing it would deprive the Fed of critical information needed to formulate monetary policy and steer the financial system in times of calamity.

Bernanke's testimony before the House Committee on Financial Services Wednesday comes just days after the Senate Committee on Banking unveiled proposed legislation that would change how the financial services industry is regulated more dramatically that any time since the Great Depression.

Among the more controversial provisions in the Senate bill, formally known as the "Restoring American Financial Stability Act," would be the creation of an independent consumer protection bureau housed within the Federal Reserve. With it's own chief and budget, the new bureau would have the power to regulate mortgage businesses, nonbank financial companies such as payday lenders and debt-collection agencies, and banks and credit unions.

Support From Volcker

But Bernanke warned against depriving the central bank of the wide swath of data it collects in it's current oversight role, which includes about 5,000 bank holding companies and another 850 smaller banks nationwide. "Even as the Federal Reserve's central banking functions enhance its supervisory expertise, its involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve's ability to effectively carry out its central-bank responsibilities," Bernanke said in his prepared testimony.

Bernanke added that the proposed changes would impair the Fed's ability to "identify and address diverse and hard-to-predict threats to financial stability," such as in the most recent crisis, as well as in the 1987 stock market crash and the attacks of Sept. 11, when "the Federal Reserve's supervisory role was essential for it to contain threats to financial stability."

Volcker, chairman of the President's Economic Recovery Advisory Board and chairman of the Fed from 1979 to 1987, echoed Bernanke's defense of the central bank's current powers. "It would be a really grievous mistake to insulate the Federal Reserve from direct supervision of systemically important financial institutions," Volcker said in his prepared testimony.

"Something important, if less obvious, would also be lost if the present limited responsibilities for smaller member banks were to be ended," Volcker added. "The Fed's regional roots would be weaker and a useful source of information lost."

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