Bernanke presses for reforms, eyes bank capital

CHATHAM, Massachusetts (Reuters) - Federal Reserve Chairman Ben Bernanke on Friday laid out his most detailed description yet of the central bank's post-crisis approach to regulation and said requiring big banks to hold more capital was under consideration.

Speaking at a conference sponsored by the Boston Fed, Bernanke outlined steps regulators around the globe are mulling to lower the risk of any one firm's problems destabilizing the financial system.

He said regulators were also considering requiring banks to hold a greater share of capital in the form of common equity. A requirement that some firms issue contingent capital, a debt-like security that can convert to equity in times of stress, is another possibility, he said.

"We are working with our domestic and international counterparts to strengthen the standards governing bank capital, liquidity, risk management, incentive compensation and consumer protection, among other areas," Bernanke said.

Leaders of the Group of 20 major economies agreed last month to encourage changes in bank behavior and rein in the type of recklessness that fueled the credit crisis that shook the world's financial system last year.

On Thursday, the Fed issued guidelines regarding the thousands of banks it regulates, to tie their compensation more closely to the risks those firms take.

BERNANKE PRESSES FOR ACTION ON REFORMS

Bernanke at the Boston Fed conference urged pushing forward with regulatory reforms even though financial conditions had improved.

"With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises," he said.

Fed officials have endorsed similar approaches to boosting bank capital in recent weeks.

New York Fed President William Dudley earlier this month said a capital surcharge for systemically important banks would be one way to tackle the problem of some banks being seen as so important the government would have to bail them out if they ran into trouble.

On Thursday, Boston Fed President Eric Rosengren said the central bank was thinking carefully about giving banks the ability to convert debt into equity in times of strain.

Demanding extra capital for banks that are too big to fail makes sense, said Ray Soifer, an independent bank consultant in Green Valley, Arizona. Such banks are getting an implicit government guarantee for free, so there is merit to creating a cost for that expected support, Soifer said.

Bernanke acknowledged regulators fell short in spotting risky practices that contributed to the meltdown. He said the central bank would conduct more comprehensive reviews of banks and demand more reporting.

However, he said the Fed is unlikely to repeat in the near term the extensive stress-tests done on major U.S. banks earlier this year.

Still, "many of the lessons, particularly looking at the system as a whole, trying to identify system-wide exposures, system-wide practices that pose risks, will be part of our basic tool-kit going forward," he said.

The Fed's examination of capital buffers at the nation's 19 largest banks helped restore confidence in the financial system and made it easier for banks to raise private capital.

Congress is wrestling with regulatory reforms aimed at avoiding a repeat of the crisis that helped push the U.S. economy into its deepest recession since the 1930s.

President Barack Obama has pushed lawmakers to wrap up their efforts by year-end, but the process is likely to drag into next year as Congress wrangles over details.

Another senior Fed official said authorities need to cooperate across borders to plug gaps in financial oversight and prevent a repeat of the recent financial crisis, even as national authorities adopt local approaches.

"Deficiencies must be fixed on a global basis to forestall gaps and regulatory arbitrage that could undermine the effectiveness of regulation," Federal Reserve Vice Chairman Donald Kohn said at the same conference as Bernanke.

"But at the same time, regulations must be passed and implemented nationally," he said.

Officials should take their time with regulatory reforms to make sure that they "get it right" and find a lasting solution, Kohn said.

(Additional reporting by Ros Krasny; writing by Mark Felsenthal and Ros Krasny; Editing by Chizu Nomiyama)