Federal Reserve Chairman Ben Bernanke prodded Congress 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, sharpen consumer protections and on Thursday unveiled a sweeping proposal to police banks' pay policies to make sure 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 the Bernanke's 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 financial system.
And, the costs for such a mechanism should be paid through an assessment on the financial industry, not by taxpayers, the Fed chief 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.
A House panel on Thursday approved a piece of the Obama plan, creating a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate hikes. Doing so, however, strips some powers from the Fed.
Bernanke, in his remarks Friday, talked about the Fed's efforts to bolster consumers protections.
He also said the Fed is working on rules to better safeguard consumers from abuses when it comes to overdraft protection, reverse mortgages and gift cards. But he didn't get into a public debate over whether the Fed — or a new consumer agency — is best equipped to do the job.
Forceful actions taken by the Fed and the government helped avert a global financial crisis last fall and since then financial conditions have "improved considerably," Bernanke said.
But the fallout from the crisis has been severe, reflected in deep drops in economic activity and heavy job losses both in the United States and overseas, he said.
The Fed chief didn't talk about the future course of interest rates in his speech or in a brief question-and-answer session afterward.
To nurture the budding recovery, the Fed is expected to keep a key bank lending rate near zero when it meets in early November. Analysts predict rates will stay at super-low levels into part of next year.
On another topic, Bernanke said he doesn't anticipate that the Fed will conduct another round of "stress" tests on big banks to check on their financial health.
Earlier this year, the Fed's first-ever stress tests found that some banks needed to boost their capital as a cushion against future losses.
Since the start of the year all 19 banks that participated in the stress tests have raised more $150 billion in capital, he said.
One questioner suggested that Bernanke team up with Obama to do a series of videos to help make families more financially literate.
One of the many factors contributing to the financial crisis was decisions made by some people to buy houses they couldn't afford. Mortgage defaults spiked as did home foreclosures.
"I'm reminded about kids who speed and then they have to watch these films about car crashes," the Fed chief quipped about the video suggestion. The Fed has stepped up outreach to consumers in the wake of the crisis, he said.