Bernanke urges Congress to enact reforms

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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.

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."

Bernanke was speaking in Chatham, Mass., at a conference sponsored by the Federal Reserve Bank of Boston, which was entitled "After the Fall -- Re-evaluating Supervisory, Regulatory, and Monetary Policy."

"All financial regulators, including of course the Federal Reserve, must take a hard look at the experience of the past two years, correct identified shortcomings, and improve future performance," Bernanke said.

While policy makers have made progress toward securing a sustained economic recovery, Bernanke said additional regulatory steps need to be taken to ensure a sound economic future.

"Regulators and supervisors can do a great deal, but comprehensive financial reform requires action by the Congress," 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.

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.