An economic recovery won’t be possible until the financial system is stabilized, says Ben Bernanke, U.S. Federal Reserve chairman.

Speaking to the Council on Foreign Relations, in Washington, D.C., on Tuesday, Bernanke observed that the world is suffering through the worst financial crisis since the 1930s, which has in turn precipitated a sharp downturn in the global economy.

“Until we stabilize the financial system, a sustainable economic recovery will remain out of reach,” he said. “In particular, the continued viability of systemically important financial institutions is vital to this effort.”

“In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit,” he said.

And, at the same time, policymakers must also be thinking about reforming the financial architecture to help prevent a similar crisis in the future.

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim,” he said.

Bernanke suggested that an effective regulatory structure must address four key issues:

> financial institutions that are too big, or too interconnected, to fail;

> strengthening the financial infrastructure that governs trading, payment, clearing, and settlement;

> rules that may encourage excessive procyclicality; and

> whether it’s necessary to create an authority specifically to monitor and address systemic risks.

“In the wake of the ongoing financial crisis, governments have moved quickly to establish a wide range of programs to support financial market functioning and foster credit flows to businesses and households. However, these necessary short-term steps must be accompanied by new policies to limit the incidence and impact of systemic risk,” Bernanke concluded.

While regulators are working n these issues, some of them will require the attention of Congress, he noted.

While financial crises won’t be eliminated by reforms, Bernanke said, “Nonetheless, these steps should help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy.”

IE