Ben Bernanke, chairman of the US federal reserve, has warned against over regulation of the hedge fund industry. Bernanke said that U.S. authorities must take care not to stifle financial innovation by over-regulating the derivatives and hedge fund industries.
"I would be very reluctant to get involved in heavy-handed, direct regulation of hedge funds," Bernanke told the Senate Banking Committee in response to a question during semi-annual testimony on monetary policy.
"One of their key characteristics is that they are very nimble," Bernanke said. "That is good for the economy, because they help create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits."
U.S Treasury Secretary Henry Paulson called for market discipline, rather than government regulation, to address risks of the rising global hedge fund business at the G7 meeting. "Market discipline, focusing on risk management of regulated counter parties, is the most effective way to address potential systemic risk concerns."
Paulson and Bernanke work together as heads of the President's Working Group on Financial Markets, working with the Securities and Exchange Commission and the Commodities Futures Trading Commission to study the hedge fund industry. "The group continues to assess developments in markets, disclosure and counterpart risk management," Paulson said.
Paulson also said he's convinced "hedge funds provide considerable benefits to financial markets and our economies," but they also can present potential challenges and risks.
"It is in the U.S. interest to promote a thriving, competitive global hedge fund industry that facilitates price discovery and promotes liquidity in financial markets, while maintaining investor protection and promoting financial stability," Paulson said.
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