Bernanke: 'Too big to fail' must end

Federal Reserve Chairman Ben Bernanke said Thursday that regulators' central task in overhauling the financial system is ending the notion that there are some firms too big to fail.

The nation's financial regulators are in the early stages of implementing a wide-ranging overhaul effort enacted by President Obama in July.

"The most important lesson of this crisis is we have to end 'too big to fail,' " Bernanke testified to a blue-ribbon commission investigating the causes and consequences of the crisis. "There has to be a creditable way to let firms fail ... This is not going to be easy to implement. These are large, complex firms."

Bernanke said that "a promise not to intervene in and of itself will not solve the problem."

The financial overhaul bill sets up a new process for government regulators to dissolve failing financial firms. The Federal Deposit Insurance Corporation (FDIC), which already has power to take receivership of depository banks, is in the process of writing rules for how the new resolution process will work.

"If implementation is not properly carried out, the reforms could be ineffective in preventing future crises or containing financial market disruptions should they occur," FDIC Chairwoman Sheila Bair said in prepared testimony. Bair said regulators have a "historic chance" to create a new framework.

Bernanke argued that the central bank did not have the legal power to save Lehman Brothers in 2008 because the firm did not have the necessary collateral for the Fed to lend against.

Bernanke said it "saddened" him because he knew the repercussions of Lehman's failure would be steep for the financial system overall.

"I never wavered from my view that we should do everything possible to prevent Lehman from failing," Bernanke testified.