A top U.S. bank regulator said on Thursday that watchdogs failed to control excesses in the financial system, letting record profits mask fundamental problems.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, also said in prepared testimony for the Financial Crisis Inquiry Commission, that the agency supports a new federal consumer protection agency but said primary bank regulators should be able to examine banks for compliance.

Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities, said Bair, who has been hailed by lawmakers for her early warnings about subprime-related products.

Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing.

Bair used her testimony to again chip away at the perception that some firms are too big to fail.

She said cheap financing leading up to the financial crisis led firms to take on big risks with the idea that the government would bail them out if the risks proved too big.

Why are these firms too big to fail? These firms have become highly leveraged and massively complex with multiple financial subsidiaries, extensive off-balance-sheet activities and opaque financial statements, she said.

Bair said international leverage constraints and the existence of a resolution authority to orderly dismantle troubled financial firms would reduce the too-big-to-fail problem.

(Reporting by Karey Wutkowski; Editing by Andrea Ricci)