"We must have a strategy that regulates the financial
system as a whole, in a holistic way, not just its individual components,"
he said in a speech to the Council on Foreign Relations.
Bernanke's remarks come as the Obama administration and
Congress begin to revamp their own strategies to keep banks, mutual funds and
other large financial institutions solvent -- a daunting task since the U.S.
financial rule book is based on a web of regulations dating back to the Civil
The Fed chief said that stricter oversight of banks must be
used as part of a broader plan to prevent future crises.
"Strong and effective regulation and supervision of
banking institutions, although necessary for reducing systemic risk, are not
sufficient by themselves to achieve this aim," Bernanke said, according to
the New York Times.
The U.S. recession could end this year, he said, but only if
the government can get financial markets to operate more normally again. The
recession, which has stretched on for months and is already the longest in a
quarter-century, has turned out to be more severe than the Fed had anticipated,
On predicting the path for the recession, Bernanke later said
"my forecasting ability on this recession has been about as good as the
win-loss percentage of the Washington Nationals," referring to the
baseball team that finished in last place last season, the Washington Post
Bernanke outlined four key elements to guide the regulatory
overhaul. Among them, the Fed chief said "too-big-to-fail" companies
must be subject to more rigorous supervision to prevent them from taking
excessive risk, Bernanke said. The Fed is trying to identify "best
practices" that can help companies detect trouble spots and manage risks.
Over the past year, the government has been forced to rescue
major financial companies so interwoven with the global financial system that
their collapse would put the entire economy in danger.
"Government rescues of too-big-to fail firms can be
costly to taxpayers, as we have seen recently," Bernanke said.
"Indeed in the present crisis, the too-big-to-fail issue has emerged as an
Bernanke also said the nation's financial plumbing, the
infrastructure and policies that govern financial transactions, must be
strengthened to ensure that it will hold up under difficult conditions.
"We must strengthen what I will call the financial
infrastructure--the systems, rules, and conventions that govern trading,
payment, clearing, and settlement in financial markets--to ensure that it will
perform well under stress," the Fed chief said, according to prepared
A third component calls for reviewing regulatory policies
and accounting rules to make sure they don't "overly magnify the ups and
downs in the financial system and the economy," he said.
Finally, the government should consider creating an
authority specifically responsible for monitoring financial risks and
protecting the country from crises like the current one. Some in Congress -- and
the previous Bush administration -- have proposed that the Fed take on this
role of top financial cop.
Bernanke said the United States could take a "macroprudential"
approach - which involves broad monitoring of markets and financial
institutions for signs of bubbles, growing risks like the subprime mortgage
market, or risks shared by interconnected markets, the New York Times reported.
In a later question-and-answer session, Bernanke was asked
whether he ever has second thoughts about taking the job as Fed chief. He said
he couldn't deny there's been "some dark days, some difficult nights,
difficult weekends, but I don't regret it."