Bernanke calls for revamped banking oversight

WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Thursday called for a holistic approach to strengthening oversight of the banking system and said information gleaned from big bank stress tests should pave the way for improvements on that front.

Regulators must not only sharpen their assessments of individuals banks, but also examine the financial system as a whole to detect risks that could endanger the normal flow of credit, market operations and commerce — critical elements to the smooth functioning of the U.S. economy, Bernanke said.

"A principal lesson of the crisis is that an approach to supervision that focuses narrowly on individual institutions can miss broader problems that are building up in the system," the Fed chief said in remarks delivered via satellite to a Fed conference in Chicago.

The current financial crisis — the worst since the 1930s — has revealed "serious deficiencies" on the part of some financial institutions, which regulators are working to fix, Bernanke said.

Those deficiencies on the part of banks include not having adequate capital, or buffers, on hand against potential losses. Some banks also did not plan effectively to make sure they have easy-to-sell "liquid" assets if economic conditions worsen, and they did not have strong risk management policies in place to detect problems, he said.

"Increasing the effectiveness of supervision must be a top priority," Bernanke said.

In fielding questions after his remarks, Bernanke said he hoped stress test results would give Wall Street "greater confidence" that the nation's 19 largest banks will be "strong and able to lend even if the economy is worse than expected."

Going forward, Bernanke stressed the need for banks to build up a capital buffer in good times so that it can be drawn down if things turn sour. If banks had done this in the current crisis it might have provided "some assistance," although he didn't know if it would have prevented the financial debacle.

And he said regulators are putting more attention on assessing banks' liquidity positions. Regulators are monitoring this "more intensely" and on a daily basis, Bernanke said.