Federal Reserve Board Chairman Ben Bernanke has told three senators that a provision in the regulatory reform bill that would force banks to spin off their swaps trading desks would be "counterproductive."

"Forcing these activities out of insured depository institutions would weaken both financial stability and strong prudential regulation of derivative activities," Bernanke wrote Wednesday in a letter to Sens. Chris Dodd, D-Conn.; Richard Shelby, R-Ala., and Kirsten Gillibrand, D-N.Y.
Bernanke said the provision would make the U.S. financial system "less resilient and more susceptible to systemic risk."

The Fed chairman said such prohibitions would "weaken the risk-mitigation efforts of banks," who use derivatives to hedge the interest rate, currency and credit risks that arise from loan, securities and deposit portfolios.

It could also "push derivatives activities out of banks and potentially into less regulated entities or into foreign firms that operate outside the boundaries of our federal regulatory system," Bernanke wrote.

Foreign banks also would end up with a competitive advantage over U.S. banking companies in the global derivatives marketplace, he said.

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