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Bernanke: Fix financial oversight system

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The Associated Press

Published: October 24, 2009

WASHINGTON - Federal Reserve Chairman Ben Bernanke prodded Congress on Friday to enact legislation overhauling the nation's financial regulatory system to prevent a repeat of the banking and credit debacles that had 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," Bernanke said in remarks to a Fed conference in Chatham, Mass.

For its part, the Fed has been taking steps to strengthen oversight of banks and sharpen consumer protections. On Thursday, it unveiled a sweeping proposal to police banks' pay policies to ensure they don't encourage top executives and other employees to take reckless gambles.

But Congress needs to step in and close regulatory gaps and make other 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 system.

And the costs for such a mechanism should be paid through an assessment on the financial industry, not by taxpayers, Bernanke said.

Moreover, Congress needs to set up better systems for regulators to monitor risks lurking in the financial system, he said.

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.

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