Bernanke Begins ‘Thorough Review’ of Fed Disclosure (Update1)

Feb. 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke initiated a review of the information it provides the public after lawmakers criticized the central bank’s disclosure policies during the unprecedented expansion of its holdings.

“We at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication,” Bernanke said today in remarks prepared for testimony before the House Financial Services Committee. Board Vice Chairman Donald Kohn will lead a panel for the review.

Bernanke has invoked emergency authority and more than doubled the size of the Fed’s balance sheet to $1.8 trillion to combat the worst credit crisis in seven decades. His moves have prompted concern that the central bank is encouraging excessive risk-taking, distorting pricing in financial markets and jeopardizing the Fed’s independence. The Fed hasn’t disclosed many of the assets and participants in its programs.

“It does not seem to me healthy in our democracy for the amount of power that is now lodged in the Federal Reserve with very few restrictions to continue,” said Representative Barney Frank, a Democrat from Massachusetts and the committee chairman.

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

‘Affirmatively Justified’

The Kohn panel will have a “presumption” that the public has a right to know and that “nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality,” Bernanke said.

Bernanke also said the Fed is preparing a Web site where the public can find more details and analysis about the Fed lending effort. He defended the programs, saying they helped restore liquidity and buffer risk during a severe credit crisis.

“Our lending to financial institutions, together with actions taken by other agencies, has helped relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets,” Bernanke said.

Policy makers cut the benchmark lending rate to as low as zero in December and are now focusing on expanding emergency credit programs to reduce borrowing costs. The Fed said today that it may expand a program aimed at supporting consumer loans to $1 trillion from $200 billion. Separately, the Fed is buying $600 billion of debt sold by government-backed mortgage finance companies and mortgage-backed securities they guarantee.

‘Exigent Circumstances’

Under section 13.3 of the Federal Reserve Act, the Federal Reserve Board “in unusual and exigent circumstances” can authorize lending by reserve banks to individuals, partnerships and corporations that are unable to obtain “adequate credit.”

Bernanke, 55, and the Fed governors used the authority for the first time since the Great Depression last March in a $13 billion emergency loan to Bear Stearns Cos., which faced a run by creditors.

Since then, Bernanke has broadened the use of emergency powers to support financial institutions and entire markets.

The use of emergency powers to support markets “is well justified in light of the breakdowns of these critical markets and the serious implications of those breakdowns for the health of the broader economy,” Bernanke said. He said the use of emergency powers to support institutions “might not have been necessary” if the U.S. had a system in place for the resolution of failing investment banks and financial firms other than banks.

‘Robust Resolution’

“The Federal Reserve believes that the development of a robust resolution regime should be a top legislative priority,” Bernanke said.

The Fed chairman started the Primary Dealer Credit Facility, a direct loan program for government bond dealers, and the Commercial Paper Funding Facility, which now finances $258 billion in short-term notes issued by corporations.

The Fed said today that its latest program, known as the Term Asset-Backed Securities Loan Facility, could expand to as much as $1 trillion and include additional assets such as commercial and private label residential mortgage-backed securities and bonds backed by student loans, credit cards debts, auto loans, and small business loans.

The central bank’s holdings have surged over the past year by $979 billion.

Some reserve bank presidents have argued for a more impartial approach to credit markets.

Richmond Fed President Jeffrey Lacker, 53, dissented against the central bank’s credit programs last month, preferring the injection of money into the economy through purchases of Treasuries.

‘Neutral’ Toward Markets

The Fed should be “neutral in its effects across different credit markets” rather than favoring specific credits, such as consumer loans, Lacker said in a Feb. 1 press conference.

Kansas City Fed President Thomas Hoenig, 62, said Jan. 7 the central bank “must design an exit strategy” that allows the Fed to withdraw as a bank of last resort to the economy.

“Government must think carefully about the incentives that are created by its efforts to restore both confidence and the financial strength of these institutions so as not to exacerbate moral hazard or to engender undesirable outcomes down the road,” Philadelphia Fed President Charles Plosser said in an interview last week.

The Fed’s actions have helped stabilize the financial system, pushing interbank borrowing rates closer to the federal funds rate as risk aversion dissipated. The yield difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars, and the benchmark federal funds rate stood at 1 percentage point today. The spread widened to 4 percentage points on Oct. 10.

‘Aggressive’ Policy

“We believe that the aggressive liquidity provision by the Fed and other central banks has contributed to the recent declines in Libor,” Bernanke said.

The dramatic expansion of Fed credit hasn’t prevented a severe contraction in growth. The U.S. unemployment rate rose to 7.6 percent last month, the highest level since 1992, as companies shed 598,000 jobs. Losses spanned almost all industries from trucking and construction, to retailing and finance.

U.S. gross domestic product will contract 1.5 percent this year, according to the median estimate of economists surveyed by Bloomberg News.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net;

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net