Paulson: Banking regulations need overhaul

Both Britain and the United States must overhaul the outdated methods of their financial watchdogs to provide better advance warning of looming troubles in world markets, he said in remarks at a Chatham House think tank event at London's Royal Academy of Arts. Paulson also said the U.S. Federal Reserve needs sweeping new powers that would make it easier to get information on financial institutions--and to intervene if necessary.

"This year, it is clear that Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk," Paulson said.

Banks in both Britain and the United States have suffered the impact of the global credit crunch in recent months and have needed government intervention.

U.S. investment bank Bear Stearns was spared from near collapse in March after the Federal Reserve orchestrated its sale to JPMorgan Chase & Co. In Britain, mortgage lender Northern Rock was nationalized in February after worries over its future triggered the first run on a British bank since 1866.

Both episodes undermined serious public confidence in financial markets.

But Paulson said the Federal Reserve currently has "neither the clear statutory authority nor the mandate to attempt to anticipate and prevent risks across our entire financial system."

"We should create a system that gives us the best chance of foreseeing a crisis, including a market stability regulator with the authorities to avert systemic issues it foresees," he said.

Paulson warned that major global markets must root out the perception that some financial institutions are too big, or too complex, to fail.

Markets need to be robust enough to withstand the collapse of a major firm, with government intervention an unusual act, he said.