WASHINGTON — Federal Reserve Board Chairman Ben Bernanke was called upon on Tuesday to come to the defense of the Dodd-Frank Act as a growing group of bipartisan lawmakers continue to insist that the financial reform law did not eliminate "too big to fail."

The central banker's newest foe was none other than Sen. Elizabeth Warren, D-Mass., who thanked Bernanke for his support of the Consumer Financial Protection Bureau and then pressed him repeatedly on why regulators have not done more to rein in the big banks.

"When are we going to get rid of 'too big to fail?'" Warren asked, noting that the problem has been clear for five years now.

She was seconded by conservative Republican Sen. David Vitter of Louisiana, who said he shared his "top concern" with Warren, "and I think that is a statement in and of itself."

"There is growing bipartisan concern across the whole political spectrum about the fact — I believe it's a fact — that 'too big to fail' is alive and well," he said.

But Bernanke, appearing before the Senate Banking Committee while he delivered the Fed's semi-annual monetary policy report, was forceful in his replies to both lawmakers. He noted a range of actions regulators have taken under Dodd-Frank, including requiring big banks to hold more capital, the institution of new liquidity requirements and forcing the largest institutions to detail how they could be dismembered. He also praised new powers held by the Federal Deposit Insurance Corp. to seize and dismantle flailing large banks.

His overall point was that efforts to eliminate "too big to fail" are more about the journey, not the destination.

"Some of these rules take time to develop," Bernanke said. "The orderly liquidation authority, I think we've made a lot of progress on that. We've got living wills. I think we're moving in the right direction. If additional steps are needed, then Congress, obviously, can discuss those, but we have a plan and I think it's moving in the right direction."

Resolving the 'too big to fail' problem, he said, has no set end point. Rather, it's an issue that can only be resolved gradually over time.

"It's not a 0-1 kind of thing," said Bernanke. "It's over time you'll see increasing market expectations that these institutions can fail."

How best to convince markets that regulators are serious about ending too big to fail was a key debating point during the hearing. In her questions to Bernanke, Warren cited a recent study by an economist at the IMF on the subsidies that the country's largest banks, JPMorgan Chase & Co., Wells Fargo & Co., Citbank Inc., and Bank of America Corp., receive because no one believes that the government will actually let those firms fail. (Bloomberg View published a column on Feb. 20 quantifying the amount that subsidy as roughly $83 billion.)

"Big banks are getting a terrific break and the little banks are just getting smashed on this," said Warren, in an often interrupted exchange with Bernanke. "These financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government would step in and bail them out."

But Bernanke said that over time, the benefits of being large would eventually decline.

"Some banks are going to voluntarily begin to reduce their size because they're not getting the benefit that they used to get," he said.

But his forecast seemed to do little to alleviate Warren's concern.

"I read your predictions on this in your earlier testimony," said Warren. "But so far it looks like they're getting $83 billion for staying big."

She suggested that banks should be taxed based on the amount of the subsidy they receive.

Bernanke suggested, however, that the study may be incorrect.

"Well, that's one study, Senator," he said. "You don't know whether that's an accurate number."

He also said that market expectations may also be wrong.

"That's the expectation of markets but that doesn't mean we have to do it," Bernanke told Warren. "I think what we have to do is solve the problem, senator. I think we are really in agreement on this. Too big to fail is not absolute."

Vitter also pressed the point, dismissing the idea that Dodd-Frank had dealt with the issue. He said the market was well aware of new powers under the reform law, but still expects a bailout.

"In my opinion, they've been digested and valued by the market," said Vitter. "And the market still says there's too big to fail."

He also pointed to another study from the FDIC in September that concluded the largest banks pay less than smaller institutions for comparable deposits.

"We show that some of the difference in the cost of funding cannot be attributed to either differences in balance sheet risk or any nonrisk-related factors," the study said. "The remaining unexplained risk premium gap is on the order of 45 basis points. Such a gap is consistent with an economically significantly 'too big to fail' subsidy paid to the largest banks."

An IMF paper, Vitter added, attempted to quantify the subsidy, which had been 60 basis points at the end of 2007, and later grew to 80 basis points by the end of 2009.

Sen. Bob Corker, R-Tenn., also challenged the Fed's power to resolve the 'too big to fail' problem, saying that the agency has had time to address the issue already and noting how the financial reform law increased the central bank's powers. He asked if Bernanke would identify any institution that is currently so large its failure would damage the American economy.

"You came out a big winner in Dodd Frank," said Corker. "I guess I would just ask the question, why would you not go ahead and identify that?"

Bernanke made clear such powers do not lie strictly with the Fed and cross a number of agencies under the council.

"It is the goal of the powers that you gave to the Fed and other agencies is to — as much as possible — eliminate that problem over time," said Bernanke. "If additional steps … I think would require congressional action beyond what we have implemented."

It was the third time during the hearing that Bernanke suggested that if Congress felt unsatisfied with the current regulatory reform efforts to squash the perception of 'too big to fail,' then perhaps lawmakers should take further legislative action.

But Corker didn't see it that way.

"I don't think so," he said, adding he would just follow up with a letter.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.