Bernanke urges Congress to enact reforms

NEW YORK (CNNMoney.com) -- Federal Reserve chairman Ben Bernanke said Friday that the turmoil in the financial system is "abating," but urged lawmakers to enact comprehensive reforms to help prevent future crises.

In a speech to central bankers in Massachusetts, Bernanke said legislative action is needed to ensure that banks have sufficient capital reserves, and to limit the risks that financial institutions can take.

The Fed chief also called on Congress to create new mechanisms to deal with the systemic risks posed by financial institutions deemed "too big to fail."

"As we work together to build on the progress already made toward securing a sustained economic recovery, we cannot lose sight of the need to reorient our supervisory approach and to strengthen our regulatory and legal framework to help prevent a recurrence of the events of the past two years," he said.

The remarks came one day after the Federal Reserve proposed a review of pay practices at 28 of the nation's largest banks to make sure employees are not tempted to make the kinds of risky bets that helped sink firms such as Lehman Brothers.

"Compensation, not only at the top but throughout a banking organization, should appropriately link pay to performance and provide sound incentives," Bernanke said.

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Bernanke also said more should be done to help protect consumers from "unfair and deceptive practices." He said the Fed has written rules providing "strong substantive protections" for mortgage borrowers and credit card users.

"We have seen that flawed financial instruments can both harm families and impair financial stability," the official said.

Building on the success of this year's bank stress tests, Bernanke said the central bank will conduct "more frequent, broader, and more comprehensive" examinations of the U.S. financial system.

Bernanke said a new "resolution regime" is necessary to wind down non-bank financial firms, such as insurance companies, that could destabilize the financial system and the economy. Any costs resulting from such a resolution should be paid by the financial industry and not the taxpayers, he added.  

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