Kohn stated that the central bank is likely to become "more forceful" with the financial institutions it supervises. And, although he did warn banks to rely less on the assessments of credit-rating agencies, Kohn didn't explain what new actions the Fed might take.
Regulators are now looking to deal with turmoil stemming from problems in the U.S. housing market after years of watching the banking industry make record profits. Large U.S. banks have had to write down the value of assets by billions of dollars, including slivers of mortgage-backed debt that many believed were almost risk-free.
Mr. Kohn's comments mark one of the few times that a top Fed official has acknowledged shortcomings in regulation as a cause of the mess.
"I don't know that we fully appreciated all the risks out there," he told the Senate Banking Committee. "I'm not sure anybody did, to be perfectly honest." Later, he said the Fed "did not perform flawlessly -- I absolutely agree with that."
U.S. and foreign bank supervisors are taking a second look at risk-management practices at banks, in part because most of the big recent blowups have occurred at financial institutions closely supervised by regulators.
U.S. regulators at the Senate hearing said they expected to make changes to new international rules that govern how much capital banks must hold, among other areas. Nout Wellink, chairman of the Basel Committee on Banking Supervision, the body that devised the new rules, said yesterday in a speech in Singapore that such changes were likely in light of the lessons learned from the global market disruption.
The Fed is just one of several government entities that oversee the banking industry. It is charged with regulating the parent companies of most of the country's largest banks.