Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.
The Fed chief's remarks come as the Obama administration and Congress are crafting their overhaul strategies. For the administration, critical work will be carried out among global finance officials this weekend in London ahead of next month's meeting of leaders from the world's 20 major economic powers.
The patchwork of U.S. financial rules dates to the Civil War. Congress, the administration and the Fed want to strengthen the system to avoid any future financial crises from plunging the U.S. economy and many others into recession.
Bernanke said there's a "good chance" the U.S. recession could end this year if the government is successful in getting financial markets to operate more normally again. The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than anticipated, he acknowledged after his speech.
To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in such a way to minimize fallout to the national economy - similar to how the Federal Deposit Insurance Corp. deals with bank failures. Such "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking excessive risk, he said.
The bailouts of insurance giant American International Group Inc., Citigroup Inc., Bank of America Corp., and mortgage finance companies Fannie Mae and Freddie Mac have put billions of taxpayers' dollars at risk over the past year and angered the American public.
Policymakers also should consider ways to bolster money market mutual funds that are susceptible to runs by investors, Bernanke said. That could be done by imposing tighter restrictions on the financial instruments that money markets can invest in or through a limited system of insurance for certain funds.
Bernanke also called for a review of regulatory policies and accounting rules, suggesting a larger financial buffer for the FDIC's insurance program for bank deposits that could be used when conditions worsen. Capital regulations for banks and other financial institutions also must be "appropriately forward-looking" to ensure sufficient money is set aside against potential losses.
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 the Fed, which already serves as the lender of last resort to troubled financial companies, take on this super financial cop role.
Asked whether he ever has second thoughts about taking the job as Fed chief, Bernanke said he couldn't deny there's been "some dark days, some difficult nights, difficult weekends, but I don't regret it."
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