U.S. Federal Reserve Board Chairman Ben Bernanke says that the Fed’s efforts to bolster market liquidity have helped ease the credit crunch, but that markets are still some distance from normal operating conditions.

Speaking to the Federal Reserve Bank of Atlanta Financial Markets Conference via satellite, Bernanke recounted the Fed’s efforts to bolster liquidity in response to the credit market disruption that began last August. “To date, our liquidity measures appear to have contributed to some improvement in financing markets,” he said, noting that its decision to provide to liquidity to primary dealers for the first time “seems to have bolstered confidence” among the firms’ counterparties.

He pointed out that conditions have improved in a number of markets, “These are welcome signs, of course, but at this stage conditions in financial markets are still far from normal,” Bernanke cautioned. “A number of securitization markets remain moribund, risk spreads–although off their recent peaks–generally remain quite elevated, and pressures in short-term funding markets persist.”

“Ultimately, market participants themselves must address the fundamental sources of financial strains–through deleveraging, raising new capital, and improving risk management–and this process is likely to take some time,” he added, noting that the Federal Reserve’s various liquidity measures, “should help facilitate that process indirectly by boosting investor confidence and by reducing the risks of severe disruption during the period of adjustment.”

Bernanke allowed that central banks face a tradeoff when deciding to provide extraordinary liquidity support. “A central bank that is too quick to act as liquidity provider of last resort risks inducing moral hazard; specifically, if market participants come to believe that the Federal Reserve or other central banks will take such measures whenever financial stress develops, financial institutions and their creditors would have less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks,” he said. Therefore, he suggested, that the problem of moral hazard “can perhaps be most effectively addressed by prudential supervision and regulation that ensures that financial institutions manage their liquidity risks effectively in advance of the crisis.”

He noted that the Federal Reserve and other supervisors are reviewing their policies and guidance regarding liquidity risk management to determine what improvements can be made. “In particular, future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing,” he said.

“Of course, even the most carefully crafted regulations cannot ensure that liquidity crises will not happen again. But, if moral hazard is effectively mitigated, and if financial institutions and investors draw appropriate lessons from the recent experience about the need for strong liquidity risk management practices, the frequency and severity of future crises should be significantly reduced,” he concluded.