Financial regulators should look beyond their primary role of safeguarding individual institutions by giving priority to market stability, Federal Reserve chief Ben Bernanke said Wednesday. He said that the failure of large, complex, and interconnected financial firms could disrupt the broader financial system and the overall economy, and that they should be regulated with that factor in mind. Likewise, he said, the costs of the failure of critical financial infrastructures, such as payments and settlements systems, were likely to be much greater and more widely felt than costs imposed directly on their owners and participants. “Regulatory agencies must thus supervise financial institutions and critical infrastructures with an eye toward overall financial stability as well as the safety and soundness of each individual institution and system,” he said at a conference in New York. The text of Bernanke's speech was released by the central bank in Washington. He said a financial crisis that led to the collapse of several large US institutions, such as Lehman Brothers in 2008, demonstrated the weakness of a too-narrow focus on safety and soundness of individual institutions or systems. This could result in a failure to detect and thwart emerging threats to financial stability that cut across many firms or markets, he said. A key component of a “successful” approach to supervision is a requirement that “all systemically important financial firms be subject to consolidated supervision.” Bernanke said the government must also have the tools to handle a failing firm in a manner that preserved market discipline. It could be done by ensuring that shareholders and creditors incur losses and that culpable managers are replaced while at the same time cushioning the broader financial system from possibly destabilizing effects of the firm's collapse, he said. “Having a method to resolve failing firms safely is necessary if commitments to allow failure are to be credible, which in turn is essential to reverse the perception that some firms are too big to fail,” he said. Bernanke said landmark financial reform legislation being considered in the US Congress would provide for such a resolution regime, adding that it could be enacted in the next few weeks. A key challenge would be fostering the international cooperation needed to manage the cross-border aspects of such a resolution regime, he said. In midmorning trading, the Dow fell 71.80, or 0.7 percent, to 10,337.66. The Standard and amp; Poor's 500 index fell 7.30, or 0.7 percent, to 1,107.31, and the Nasdaq composite index fell 15.28, or 0.7 percent, to 2,290.65.
