updated 5/15/2008 9:43:27 AM ET 2008-05-15T13:43:27

Commercial banks and other financial institutions need to beef up their ability to detect and protect themselves against risks like the credit and mortgage debacles, Federal Reserve Chairman Ben Bernanke said Thursday.

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The trio of crises — housing, credit and financial — have exposed weaknesses in financial firms’ ability to sufficiently detect and hedge against risks. Banks and other financial players have racked up multibillion-dollar losses when investments in complex mortgage-backed securities soured with the collapse of the housing market. Credit problems in housing quickly spread to other areas, intensifying the turmoil.

“Improvements in banks’ risk management will provide a more-stable financial system by making firms more resilient to shocks,” Bernanke said in prepared remarks to a Federal Reserve banking conference in Chicago.

Banks need to improve upon efforts to identify and measure risk, value their assets and liabilities, and prepare for “liquidity” disruptions, when access to cash or the ability to smoothly buy and sell can be impaired, the Fed chief said.

Regulators also need to bolster their oversight, Bernanke said.

“It is clear that supervisors must redouble their efforts to help organizations improve their risk-management practices,” Bernanke said. “We have focused on the institutions in most need of improvement, but we will continue to remind the stronger institutions of the need to remain vigilant, particularly in light of the ongoing fragility of market conditions,” he added.

Bernanke also called upon banks and other financial institutions to step up efforts to raise capital.

“Importantly, capital raising and balance sheet repair allow for the extension of new credit, which supports economic expansion,” he said. “I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.”

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