In a speech today to the Council on Foreign Relations in Washington, Fed Chairman Ben Bernanke stressed the need for a sweeping overhaul of U.S. financial regulations.

“We should review regulatory policies and accounting rules to ensure that they do not induce excessive” swings in the financial system and economy, he said. The need for systemic risk authority” would “require” some role for the Fed.

“Governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit,” Bernanke also said today. “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach.”

But he warned that strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.

Mr. Bernanke reiterated that the central bank and other regulators “will take any necessary and appropriate steps” to ensure banks have capital to “function well in even a severe economic downturn.”
He outlined four key elements of a strategy.

1. Addressing the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail.

2. Strengthening the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under
3. A review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy.

4. A review to consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing.