Bernanke says new rules benefit smaller banks

New financial regulatory reforms should help reduce the edge that large banks, with their implicit support from government, have over smaller ones, Federal Reserve Chairman Ben Bernanke said on Wednesday.

Bernanke argued that the Dodd-Frank reform legislation will address the issue of firms perceived as too big to fail by restricting their activities, raising their capital requirements and enhancing regulators' ability to wind them down.

"A financial system dominated by too-big-to-fail firms cannot be a healthy financial system," Bernanke told a group of community bankers in a speech that did not touch on the broader economic outlook.

"One benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes," he said.

A number of other top Fed officials, including Richard Fisher, president of the Dallas Fed, and Thomas Hoenig, president of the Kansas City Fed, have argued the legislation does not go far enough. They have called for very large banks to be broken up.

Bernanke said the Fed and its overseas counterparts had specifically implemented the so-called Basel III rules for international capital standards with a long transition period in order to avoid any adverse effects of a still-fragile global recovery.

He said Basel III rules were aimed at large international banks, and that a decision had not yet been made on how exactly they might apply to small banks.

Bernanke also said the Fed will do everything possible to keep a crackdown on debit card fees from hurting small banks.

Watson no credit officer

The Fed chief said part of the reason the new laws governing the financial sector would support community banks was that regulators are cognizant of their concerns and challenges.

With that in mind, the Fed is aware that many community banks need time to recover from the financial crisis.

"We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as small as possible," he said.

Bernanke said the crisis suggested fancy computer models are no substitute for on-the-ground intelligence on lending and joked that "Watson," the IBM computer that recently won the US game show "Jeopardy!" was not well-equipped to make credit decisions.

"This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms," he said.

"Watson may play a mean game of 'Jeopardy!', but I would not trust it to judge the credit-worthiness of a fledgling local business or to build long-standing personal relationships with customers and borrowers."