Bernanke urges stronger 'holistic' financial regulation

WASHINGTON -- Federal Reserve Chairman Ben Benanke laid out a far-reaching proposal Tuesday to strengthen government oversight of banks, mutual funds and huge financial firms to prevent a repeat of the current worldwide crisis, which he termed the "worst financial crisis since the 1930s."

In a speech, and question-and-answer session, at the Council on Foreign Relations, Bernanke once again said the economy could begin a slow recovery later this year, but only if government manages to repair troubled financial markets.

Bernanke said the recession suprised the Fed by "being more severe than anticipated," serving to underscore the powerful effect of the meltdown at banks and other financial firms.

Reovery "depends critically on our ability to get the banking system and the financial system ... back to a situation where the markets are reasonably stable and they can perform their vital function," Bernanke said. "If we can do that, (there's) a good chance the recession will end later this year, and next year will be a year of growth."

In an answer to a question about the Treasury Deparment's plan to stress test banks to ensure they have healthy capital to weather a deep downturn, Bernanke said an unemployment rate averaging more than 10% for a period of time "is well within the realm of possibility" though not part of consensus forecasts at this point.

Bernanke's prepared remarks laid out his strategy for a "holistic" overhaul of financial market regulation. The White House and leading lawmakers are also preparing to begin work on a comprehensive remake of financial rules. The issue will be a top item on the agenda of a meeting in London this week of top global finance officials. That gathering will help set the stage for a meeting of leaders from the world's 20 major economic powers in April.

Bernanke laid out four key elements to guide any regulatory overhaul.

First on his list is the problem of financial institutions considered too big, or interconnected, to fail — including setting up a system to unwind troubled firms.