Bernanke calls for co-ordinated action

The chairman of the US Federal Reserve yesterday called for co-ordinated action to prevent a repeat of what he said was the worst financial crisis since the 1930s.

Ben Bernanke said leaders from the Group of 20 economies should agree early next month on principles to drive a revamp of regulation. He added that without action to stabilise the financial system there would be no sustainable economic recovery.

"Governments around the world must continue to take forceful and, when appropriate, co-ordinated actions to restore financial market functioning and the flow of credit," Mr Bernanke told the Council on Foreign Relations in Washington.

Finance ministers from the G20 meet this weekend in London to lay the groundwork for the summit early next month where regulatory reform will be high on the agenda.

"The better goal for a meeting of leaders would be, as much as possible, to establish some principles that would guide reforms around the world," Mr Bernanke said.

Mr Bernanke called for centralised oversight of the US's fragmented regulatory system, with one body responsible for checking on systemic risk. Regulators in the US and other big countries failed to ensure that massive savings outflows from Asia to the West were invested in a way that maintained financial stability, he said.

He said the dangers of massive financial institutions that were "too big to fail" included the creation of moral hazard and encouragement of excessive risk taking. Those institutions needed special oversight and a process for "orderly resolution" if they become insolvent.

Mr Bernanke added his voice to calls for bank capital rules to be changed so that a buffer was built up in good times that could absorb losses when the economy slowed.

If the right steps are taken there is a good chance that the recession could end this year, he added.