Ex-Fed head: Investment banks need stricter rules

WASHINGTON -- Investment banks should be regulated more like commercial banks if they're going to get the same kind of help from Washington, former Federal Reserve chairman Paul Volcker said Wednesday.

Such a step is a "natural corollary" to the assistance the Federal Reserve has extended recently to Wall Street investment banks such as Bear Stearns, Volcker told Congress' Joint Economic Committee. The Fed's financial backing previously was only available to commercial banks.

Volcker's comments came a day after Federal Reserve Chairman Ben Bernanke said the credit crisis appears to be easing, in part due to the central bank's actions.

Sen. Charles Schumer, a New York Democrat, however, said that an overhaul of the financial regulatory system is still needed, even if "things do not seem as bad as they were a month or so ago."

"We must figure out how to regulate the currently unregulated parts of financial markets," he said, citing credit default swaps, "a multi-trillion dollar industry almost completely outside the purview of regulators," as an example.

Broader regulation is justified, Volcker said, by extreme episodes of market turmoil that aren't properly anticipated by new, complex financial models.

A lesson of the current credit turmoil is that "mathematic modeling ... cannot easily take account of the human element of markets," he said.

Treasury Secretary Henry Paulson last month released a blueprint that would combine the overlapping regulators into three agencies and give the Federal Reserve more authority to monitor the stability of the broader financial system. Members of Congress have said that legislative action may have to wait until next year and a new administration due to the complexity of the issue.

At the height of the credit crunch in early March, the Federal Reserve provided a $29 billion loan to support JPMorgan Chase & Co.'s purchase of Bear Stearns, which had been the fifth-largest investment bank until its near-collapse.

Bernanke also decided that month to extend emergency loans to investment banks, the broadest use of the central bank's lending authority since the 1930s.

"When things are going well, no one wants to be regulated," Volcker said. "When things are going bad, everyone says to the regulator, Where were you?"