Federal reserve Chairman Ben Bernanke told lawmakers Thursday that a lack of regulation in the shadow banking system was one of the key triggers in the 2008 economic and financial crisis.
Speaking at a hearing before the Financial Crisis Inquiry Commission in Washington, D.C., Bernanke said that shadow banks (non-depository institutions) were the source of some key vulnerabilities that amplified the initial financial shock that began with the subprime mortgage crisis.
"Leading up to the crisis, the shadow banking system, as well as some of the largest global banks, had become dependent on various forms of short-term wholesale funding," he said in prepared remarks, adding that, "the reliance of shadow banks on short-term uninsured funds made them subject to runs, much as commercial banks and thrift institutions had been exposed to runs prior to the creation of deposit insurance."
The Fed chief said that the Federal Reserve had no authority to regulate the shadow banks and address their liquidity problems until the crisis had already decimated the economic and financial system.
"The Federal Reserve under normal conditions is permitted to lend only to depository institutions and had the authority to lend to non-depositories only in unusual and exigent circumstances," Bernanke said. "Thus, the Federal Reserve could not directly address liquidity problems at non-depositories until the crisis was well underway."
Highlighting other vulnerabilities in the private sector that exacerbated the crisis, Bernanke said that deficiencies in risk management that led to inadequate risk diversification, excessive debt leverage and derivatives being used as a tool for taking excessive risks.
Turning to the public sector Bernanke again highlighted the lack of regulation in the shadow banking system, telling lawmakers that there were no restrictions on the leverage and liquidity policies of such entities.
"No regulatory body restricted the leverage and liquidity policies of these entities, and few if any regulatory standards were imposed on the quality of their risk management or the prudence of their risk-taking," he said. "Market discipline, imposed by creditors and counterparties, helped on some dimensions but did not effectively limit systemic risks these entities posed."
He added, "A lack of statutory authority carried with it a lack of information. Shadow banks that were unregulated were not required to report data that would adequately reveal their risk positions or practices."
Bernanke also said that regulators made poor use of their existing authority in forcing banks to strengthen their risk management systems and limit the severity of the risks taken by them.
"The Federal Reserve's supervisory capital assessment program (SCAP), popularly known as the "stress tests," demonstrated that many institutions' information systems could not provide timely, accurate information about bank exposures to counterparties nor complete information about the risks posed by different positions and portfolios," he said. "Regulators had recognized these problems in some cases but did not press firms vigorously enough to fix them."
The chairman defended the Fed's response to the crisis, however, saying that the central bank is now ensuring that banks hold higher quality capital, have the proper liquidity to survive stressful conditions and raise their risk management standards.
Bernanke added that at the onset of the crisis, the government did not have the authority to winding down important nonbank financial institutions, stressing that the creation of a nonbank resolution regime is an extremely important aspect of the recently passed financial reform bill.
"The creation of a resolution regime for systemically critical nonbank financial firms is a critical innovation of the recently passed financial reform bill," he said. "Work is under way to implement this framework. Supervisors are also working to address other resolution-related challenges that policymakers faced during the crisis, including unnecessarily complex corporate structures at many financial institutions and complications arising from the global nature of operations of many large financial institutions."
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.