Bernanke turns to Congress

Bernanke, speaking at the annual conference of the Boston Federal Reserve Bank, said the Fed has already taken a number of steps to improve supervision of banks, expanding its focus from individual institutions to include stability of the financial system. In addition, it has taken steps to crack down on risky practices, including issuing guidelines to banks to overhaul bonus systems that may spur employees to take excessive risks.

Ultimately, however, Congress must act, Bernanke said. The nation needs a way to deal with the failure of large, complex financial institutions without putting the entire system at risk or bailing them out with taxpayer money. It needs to bring all financial institutions under rigorous federal oversight. And it needs to coordinate information and action among US financial regulators to identify and prevent threats to financial stability, he said.

“It remains critical for Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks,’’ Bernanke said in prepared remarks. “Large, complex financial firms that do not own a bank, but nonetheless pose risks to the overall financial system, must not be permitted to avoid comprehensive and effective supervisory oversight.’’

Bernanke was the keynote speaker at a three-day conference sponsored by the Boston Fed. The conference, entitled “After the Fall,’’ brought together business and academic economists to explore ways to prevent another financial crisis like the one that edged the US and global economies toward another depression.

Bernanke said aggressive and coordinated international efforts by central banks and governments had averted a collapse in the global financial and economic systems. Conditions have improved substantially in recent months, he said.

“However, even though we avoided the worst financial and economic outcomes, the fallout from the crisis has nonetheless been very severe,’’ he said. “Now is the time for policy makers to take action to reduce the probability and severity of future crises.’’

Congress is now considering legislation to overhaul regulation of the financial system. Some proposals would create a single regulatory agency to replace the several that now separately oversee commercial banks, savings banks, investment banks, and security dealers. Under those proposals, the Fed would be stripped of its bank supervisory powers.

On Thursday, Boston Fed president Eric Rosengren argued that leaving bank supervisory powers with the Fed would help maintain financial stability. That structure allows economic policy makers and regulators to share forecasts and data gathered from banks to better identify risks to the financial system, he said.

Bernanke conceded that the fractured regulatory system has gaps that large financial institutions have been able to exploit. But instead of a new super agency, he called for creation of a “systemic oversight council’’ made up of top financial regulators.

The council would be charged with identifying and monitoring firms that could threaten financial stability, and coordinating action among agencies to prevent problems from spreading.

“By combining the expertise and information of all the relevant agencies and departments,’’ he said, “the council would be in the best position to identify developments that threaten the stability of the system as a whole.’’

Bernanke also called for the creation of an authority to intervene when large, complex financial institutions are failing, to ensure orderly dissolution and avoid controversial bailouts of firms considered too big to fail. It would act like the Federal Deposit Insurance Corp., which can seize troubled banks, wipe out stockholders, sell off assets, and engineer sales to protect depositors and the banking system.

No such system existed for failing institutions such as Wall Street investment firms Lehman Brothers Holdings Inc. and Bear Stearns Cos., and insurance giant American International Group.

The Fed took over AIG, pumping tens of billions of dollars into the company, and engineered the sale of Bear Stearns by guaranteeing some $30 billion in risky assets.

Lehman had to file for bankruptcy, an event widely seen as having triggered a global financial panic and crisis.

“It is clear we need an option other than bankruptcy or bailout,’’ Bernanke said. “A new resolution regime for nonbanks would permit the government to wind down a failing, systemically important firm in a way that reduces the risks to financial stability and the economy.’’

Robert Gavin can be reached at rgavin@globe.com.