Bernanke prods Congress

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke prodded Congress yesterday to overhaul the nation's financial regulatory system to prevent a repeat of last year's banking and credit debacles that thrust the country into crisis.

"With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises," he said in remarks to a Fed conference in Chatham, Mass.

Legislation also should ensure that the cost of closing large, failing financial institutions is borne by the industry instead of taxpayers, Bernanke said.

"Any resolution costs incurred by the government should be paid through an assessment on the financial industry," he said.

Bernanke's remarks coincide with efforts by the Fed to step up supervision of banks and crack down on compensation practices that fuel excessive risk-taking. As Congress considers the biggest overhaul of financial regulation since the 1930s, Bernanke said it was "critical" for lawmakers to close regulatory gaps and provide government agencies with the tools to manage risks throughout the financial system.

All large, interconnected financial firms - whether they are banks or not - should be subject to "consolidated supervision" that requires "tougher" capital, liquidity, and risk-management practices, Bernanke said. He did not urge that the Fed be given the main responsibility for that supervision.

The central bank also has been taking steps to sharpen consumer protections.

But Congress needs to step in to make some changes that only lawmakers have the power to do, Bernanke said.

At the top of his list: Congress must set up a mechanism - along the lines of what the Federal Deposit Insurance Corp. does with troubled banks - to safely wind down big financial firms whose failure could endanger the entire financial system. An example is the September 2008 collapse of investment house Lehman Bros. Holdings Inc., which brought the stock market down.

The Obama administration has proposed such action as part of its overhaul of financial rules. Its plan would expand the Fed's powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed's reach, because it and other regulators failed to crack down on problems that led to the crisis.

The House is expected to pass legislation by the end of the year, but the Senate is unlikely to consider the bill until early next year.

In a separate speech at the conference yesterday, Fed Vice Chairman Donald Kohn said there was no consensus yet on how to avoid international spillovers from the failure of large financial institutions.

Among the "promising proposals" supervisors could consider are changes "to simplify the organizational structures of systemically important firms."

Kohn said that if the Fed is given the responsibility for financial stability, it also needs a complete set of tools to do the job.