Bernanke Calls for Broader Regulations

By DAMIAN PALETTA

WASHINGTON -- Federal Reserve Chairman Ben Bernanke said regulators should be given broad new powers to oversee financial markets, reflecting the Fed's evolving view that a more aggressive government hand is needed to ensure the future safety of the financial system.

Among his recommendations were tougher capital requirements for big banks, limits on investments by money-market mutual funds, and the introduction of some mechanism that would allow the U.S. to wind down big financial institutions and possibly run them temporarily.

Mr. Bernanke's speech, delivered Tuesday to the Council on Foreign Relations, mark his most specific comments on how to rewrite the rules governing financial markets. They come days before global finance ministers meet in London to discuss new regulatory models to oversee the flow of credit.

The recommendations were largely consistent with measures being pushed by House Financial Services Committee Chairman Barney Frank (D., Mass.), who is expected to be a key architect of the new financial regulation.

There was one exception. Mr. Frank has said any changes would have to discourage "excessive risk taking" by executives, which he argues helped fuel the financial crisis. Mr. Bernanke didn't touch on compensation practices in his speech.

Mr. Frank said he was supportive of Mr. Bernanke's proposed outline. He said the speech reinforced for him why the Federal Reserve should be given powers to broadly oversee the safety of the entire financial system. Currently, various regulators oversee discrete parts. "I don't know who else could do it," Mr. Frank said.

President Barack Obama has charged Mr. Frank with developing an outline of how a new system would work in time for the Group of 20 meeting in early April.

U.S. and foreign leaders are broadly in agreement that changes must be made to the way large, complex companies are overseen. But considerable differences remain on thornier issues, such as the supervision of hedge funds. Europeans will likely look to take a stronger line than their U.S. counterparts.

Treasury Secretary Timothy Geithner on Tuesday previewed some of the regulatory changes the Obama administration will be pushing with foreign leaders in coming weeks during an interview on the Charlie Rose show. Mr. Geithner said there would have to be "more focused accountability" and a "much stronger set of oversight over all institutions that could pose risk of damage to the system." He said core parts of the financial markets, such as markets for derivatives and other complex products, must "have a basic framework of oversight around them."

Mr. Geithner also said there would be stiffer capital requirements to deter companies from becoming overleveraged "so that a mess like this never happens again."

Mr. Bernanke defended the U.S. government's efforts to stabilize the financial sector and reiterated that U.S. officials would ensure that large financial companies "would be able to meet their commitments." He also pushed for much tougher policies over these big companies.

"Any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management and financial condition, and be held to high capital and liquidity standards," Mr. Bernanke said.

The Federal Deposit Insurance Corp. has the power to shut down and sell large federally insured banks, but it isn't able to shut down the parent companies of banks or huge financial affiliates that don't have insured deposits. FDIC and Fed officials have urged Congress to give a regulator such powers. Mr. Bernanke offered details Tuesday about what such an entity might do.

He suggested the government could take these large companies and create a "bridge" institution, which would allow the government to temporarily run the company while the firm or parts of it are being liquidated. This is similar to the powers the FDIC has for large banks. The FDIC created a similar a structure last year after the failure of IndyMac Bank.

Mr. Bernanke said there should be "clear guidelines" identifying which companies might qualify for such treatment and which banks wouldn't.

Write to Damian Paletta at damian.paletta@wsj.com