Bernanke backs Obama regulation overhaul

The Fed chair talks to lawmakers on Thursday about regulatory reform.

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WASHINGTON (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke on Thursday endorsed most of the Obama administration's plan to overhaul the regulatory system, except for a consumer agency.

Bernanke pointed out the need for stronger capital requirements for all financial institutions and the need for an oversight council composed of all agencies, according to prepared remarks to the House Financial Services committee.

"To further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators -- not just the Federal Reserve -- should be directed and empowered to take account of risks to the broader financial system," Bernanke said.

He endorsed the part of the Obama plan that creates a consolidated regulator for big financial firms that could threaten the entire financial system, giving that job to the Federal Reserve, which is "well suited" for the task.

The Fed's future role in financial regulation is a subject for debate on Capitol Hill. Many Republicans and even some Democrats don't want to give the Fed more of a role.

Sen. Chris Dodd, D-Conn., who runs the Senate Banking Committee, recently said he's throwing his weight behind a consolidation of all the regulators. Dodd has been critical of the Fed's role in missing the early part of the financial crisis.

One glaring omission from Bernanke's statement was an endorsement of the Obama plan to create a new consumer financial protection agency.

Bernanke called consumer protection "vitally important" and said the current playing field is "uneven." However, he doesn't agree with proposals to strip the Fed of its consumer protection powers and give them to a new agency.

While Bernanke didn't bash the consumer agency proposal, he expressed concerns about dividing certain regulatory powers, echoing a common complaint from many financial firms and their lobbying groups.

Financial services groups have said the primary reason they oppose the consumer agency is that they're worried that banks could be pushed to make "unsound" financial decisions if they're forced to abide by rules to protect consumers by a separate regulator.

Rep. Spencer Bachus, R-Ala., the committee's ranking member, said Bernanke wrote him a letter in July indicating he was also worried about that separation of powers.

"There are some costs to separating enforcement and rule-writing," Bernanke said during the hearing.

House Financial Services chairman Rep. Barney Frank, D-Mass., noted that many lawmakers who have been the most critical of the Federal Reserve don't want to see a separate consumer agency. He suggested those lawmakers are acting hypocritically for supporting the Fed's powers to protect consumers while questioning other powers.

"If you look at the current arrangement of power involving consumer protection, in terms of mortgages, in terms of credit cards, in terms of overdraft, the largest single agency in the bank regulatory field doing consumer protection is the Federal Reserve," Frank said.

Bernanke's appearance on Capitol Hill marks his first visit since Obama announced in August that he was reappointing him.

Lawmakers on House Financial Services heard testimony last week on legislation to audit the Federal Reserve, a move the Fed opposes. Many think such an audit would threaten the Fed's independence, and Bernanke was expected to field questions about that legislation as well.