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By Michael R. Crittenden
Of DOW JONES NEWSWIRES

ARLINGTON, Va. (Dow Jones)–U.S. financial markets need to be made more resilient
and stable, Federal Reserve Chairman Ben Bernanke said Tuesday, possibly by
giving the central bank much broader authority to collect information and
exercise authority over the nation’s financial firms.

Speaking at a Federal Deposit Insurance Corp. conference on mortgage lending,
Bernanke said federal regulators, policymakers and private sector groups are
already taking steps to address some of the concerns laid bare during the turmoil
of the last year.

“In doing so, we aim not only to make the financial system better able to
withstand future shocks, but also - by reducing the range of circumstances in
which systemic stability concerns might prompt government intervention - to
mitigate moral hazard and the problem of `too big to fail’,” Bernanke said in his
remarks.

The backdrop for Bernanke’s comments was a conference on improving mortgage
lending to low and moderate-income households also set to feature Treasury
Secretary Henry Paulson, among others. Bernanke touched upon the issue briefly,
noting that the Fed plans next week to unveil a much anticipated rule on mortgage
lending that will apply to all lenders, not just banks.

But the majority of his comments were reserved for discussing the recent market
turmoil and steps that may need to be taken to “make the U.S. financial system
itself more stable.”

Noting that short-term funding markets remain strained, Bernanke said the central
bank is considering a number of options, including extending its lending
facilities to major investment banks and broker dealers beyond the end of the
year if necessary. He also said the Federal Reserve continues its efforts to
improve the clearing and settling of credit default swaps and other over the
counter derivatives.

“The infrastructure for managing these derivatives still is not as efficient or
reliable as that for more mature markets,” Bernanke said, saying regulators want
to “fundamentally change” the way derivatives are processed.

Similarly, he said regulators are in the process of developing a “contingency
plan” for the tri-party repurchase markets, where investment firms obtain large
levels of secured financing from short-term investors. Bernanke said the
experience of Bear Stearns’ liquidity problems suggest a plan needs to be in
place in case there is a similar loss of confidence in the clearing banks that
settle tri-party repurchase agreements.

“Nonetheless, over time, a stronger financial system may require changes in the
way borrowers and lenders use these markets, as well as in the settlement
infrastructure operated by the clearing banks,” he said.

More broadly, Bernanke suggested policymakers should consider whether to grant
the Federal Reserve explicit authority over more corners of the financial
markets. Stressing the need to strengthen capital, liquidity and risk management
at financial firms, as well as reducing severity of future market crises,
Bernanke said regulators need to have a more formalized process for dealing with
situations like what happened with Bear Stearns Cos. in March.

“I do not think that the Fed could fully meet these objectives without the
authority to directly examine banks and other financial institutions that are
subject to prudential regulation,” he said.

Bernanke also repeated the Federal Reserve’s defense of its involvement in
getting Bear Stearns sold to JP Morgan Chase & Co. (JPM). Allowing the firm to
fail in mid-March, Bernanke said, “would have seriously disrupted key secured
funding markets and derivatives markets and possibly would have led to runs on
other financial firms.”

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