Bernanke: Reform means taking a broad view

NEW YORK (CNNMoney.com) -- In a speech on regulatory reform, Federal Reserve chairman Ben Bernanke said Wednesday that regulators should have a broader perspective of the financial system, and ensure that tax payers are sheltered from risky behavior on Wall Street.

Speaking at Columbia University in New York, Bernanke said focusing only on the health of individual banks, rather than the interactions between banks, could cause regulators to overlook problems brewing in the financial system.

"The crisis has demonstrated that a too-narrow focus on the safety and soundness of individual institutions or systems can result in a failure to detect and thwart emerging threats to financial stability that cut across many firms or markets," he said.

The central bank chief also said reform should ensure that investors are responsible for losses due to excessive risk-taking, not tax payers. In addition, Bernanke renewed his call for a "systemic risk regulator" to prevent financial institutions from growing so large that a collapse would threaten the entire system.

"The failure of large, complex, and interconnected financial firms can disrupt the broader financial system and the overall economy, and such firms should be regulated with that fact in mind," Bernanke said.

As in the past, Bernanke said banks should be required to hold more capital to cushion against financial shocks. He also called for tougher liquidity requirements for financial firms to limit volatility in the markets.

"Minimizing the risk of future financial crises will require tougher prudential standards for financial firms, especially systemically important financial firms, as well as more intensive supervision," he said.

While they are useful in some circumstances, Bernanke said complex financial instruments called derivatives should be traded in a more transparent way.

In addition, he said the market for securities repurchase agreements, or repos, should be subject to tougher regulation.

The comments come as lawmakers in the House and Senate work to complete legislation that would drastically change how business is done on Wall Street. Bills passed by both chambers include provisions to curb risk taking, protect consumers and prevent financial firms from getting too big to fail.

The discussion Wednesday centered on a recent study from top economists on how best to reform the financial system and prevent another crisis.

The Squam Lake Report, as it's called, recommends that the Federal Reserve take the lead in overseeing the health of the financial system.

But Bernanke said concentrating authority could lead to "blind spots" and that reform should make use of skills across a number of regulatory agencies.