Bernanke: Fed should oversee all banks

NEW YORK (CNNMoney.com) -- As Congress considers limiting the Federal Reserve's regulatory authority to just the country's largest bank holding companies, Fed Chairman Ben Bernanke reiterated on Saturday that the central bank should retain power over banks of all sizes.

"Because of the remarkable diversity of the U.S. financial system, a supervisory agency that focused only on the largest banking institutions, without knowledge of community banks, would get a limited and potentially distorted picture of what was happening in our banking system as a whole," Bernanke said in a speech to the Independent Community Bankers of America.

The talk echoed points Bernanke has made in several previous speeches, when he has argued that the supervision of small banks helps the Federal Reserve monitor the pulse of the "continent-spanning, highly varied" economy.

That "breadth of vision" informs the Fed's decision-making process when setting monetary policy, Bernanke said Saturday. He added that the Fed is the only body with the expertise to keep close watch on big banks as well as regional and community banks.

"Although it was not the case in the current crisis, instability can be generated by small institutions as well as by large ones--as occurred in the Great Depression or in the thrift crisis, to cite two particularly dramatic examples," he said.

Recent regulatory reform proposals aim to strip the Fed of policing these smaller community banks, arguing that its oversight should be focused on the 35 biggest bank holding companies.

A bill put forth by Senate Banking Committee Chairman Christopher Dodd, D-Conn., earlier this week would create a new consumer regulator housed inside the Fed to ensure fair dealings with mortgages and credit cards. It would also push banks to boost capital and create a new process for taking down giant failing companies without forcing Wall Street bailouts.

Bernanke addressed the bailout issue in his comments Saturday, saying "the pernicious problem of financial institutions that are deemed 'too big to fail'" is one of the biggest hindrances to recovery.