Bernanke urges Congress to act now on overhaul

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke on Friday prodded Congress to enact legislation overhauling the nation’s financial regulatory system to prevent a repeat of the banking and credit debacles that had thrust the country into crisis.

“With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and serverity of any future crises,” Bernanke said in remarks to a Fed conference in Chatham, Mass.

For its part, the Fed has been taking steps to strengthen oversight of banks, sharpen consumer protections and on Thursday unveiled a sweeping proposal to police banks’ pay policies to make sure they don’t encourage top executives and other employees to take reckless gambles.

But Congress needs to step in and close regulatory gaps and make other changes that only lawmakers have the power to do, Bernanke said.

At the top of the Bernanke’s list: Congress must set up a mechanism — along the lines of what the Federal Deposit Insurance Corp. does with troubled banks — to safely wind down big financial firms whose failure could endanger the entire financial system.

And, the costs for such a mechanism shuold be paid through an assessment on the financial industry, not by taxpayers, the Fed chief said.

Moreover, Congress needs to step better systems for regulators to monitor risks lurking in the financial system, he said.

The Obama administration has proposed such action as part of its revamp of financial rules. Its plan would expand the Fed’s powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed’s reach because it and other regulators failed to crack down on problems that led to the crisis.

A House panel on Thursday approved a piece of the Obama plan, creating a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate hikes. Doing so, however, strips some powers from the Fed.

Bernanke, in his remarks Friday, talked about the Fed’s efforts to bolster consumers protections.

He also said the Fed is working on rules to better safeguard consumers from abusives when it comes to overdraft protection, reverse mortgages and gift cards. But he didn’t get into a public debate over whether the Fed — or a new consumer agency — is best equipped to do the job.

Forecful actions taken by the Fed and the government helped avert a global financial crisis last fall and since then financial conditions have “improved considerably.”

But the fallout from the crisis has been severe, reflected in deep drops in economic activity and heavy job losses both in the United States and overseas, he said.

The Fed chief, in his speech, didn’t talk about the future course of interest rates.

To nuture the budding recovery, the Fed is expected to keep a key bank lending rate near zero when it meets in early November. Analysts predict rates will stay at super-low levels into part of next year.