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WASHINGTON: The most important lesson to come from the financial crisis is that banks must not be allowed to become "too-big-to-fail," Federal Reserve chairman Ben Bernanke said on Thursday.
Stressing the need for banks to hold more cash in reserves and face stricter regulations, Bernanke also told a panel investigating the causes of the economic crisis that the central bank's policies did not spur the collapse.
"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," he said in prepared testimony.
He cited ongoing negotiations on the amount of reserves banks must keep to cover their operations and recently passed US legislation as the key tools to tackle the risks posed by big banks.
The near collapse of the US financial system was widely blamed on the troubles at a handful of very large banks whose reach spread throughout Wall Street and beyond.
Troubles at Bear Stearns, Lehman Brothers and AIG triggered waves of concern across the financial system as banks up and down Wall Street rushed to call in their loans, bringing the financial system to a standstill.
But criticising banks for taking excessive risks in buying up dodgy mortgage-backed securities, Bernanke denied that the Fed had fuelled risk-taking by keeping the cost of borrowing excessively low.
"Cross-national evidence also does not favour this hypothesis," he said, pointing rather to "optimism regarding house prices" and "significant capital inflows."
He also denied that the Fed could have stepped in to stop the bubble from popping by raising interest rates.
"Monetary policy is a blunt tool; raising the general level of interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy."
- AFP/de
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