He said that the Fed will do its part to promote economic recovery, but other policy measures will be needed as well. The incoming Administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity.

"With the worsening of the economy's growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions," he said, "Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets."

History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively, he added.

"Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered", he said.

Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks.

Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.

In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability.

Bernanke emphasized the importance of financial supervision on the process of striving to stabilize financial markets and institutions.

"We need stronger supervisory and regulatory systems under which gaps and unnecessary duplication in coverage are eliminated, lines of supervisory authority and responsibility are clarified, and oversight powers are adequate to curb excessive leverage and risk-taking," he said.

According to Bernanke, regulatory oversight should be coordinated internationally to the greatest extent possible and the work of strengthening the financial infrastructure should be continued. In addition, the supervisory authorities should develop the capacity for increased surveillance of the financial system as a whole, rather than focusing excessively on the condition of individual firms in isolation.

"We must take care not to take actions that forfeit the economic benefits of financial innovation and market discipline," he emphasized.

(Xinhua News Agency January 14, 2009)