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Time for new financial system safeguards?

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson indicate need for new regulation of banking industry.

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The banking industry is showing new signs of strain, which is adding urgency to calls by federal authorities for greater oversight powers.

Just a couple of months ago, executives at Wall Street banks were voicing what sounded like sighs of relief that the worst of the financial storm might be over.

That may still be the case, but the latest signs are that strong risks remain. Share prices keep heading downward as financial firms scramble to raise enough cash to tide them through tough times.

Against that backdrop, the nation's top bank regulators – Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson – are urging new measures to safeguard a financial system that's more dependent than ever on investment banks that are outside the traditional authority of these regulators.

Their words probably won't result in new legislation this year, but the implication is clear: An era of expanded regulation is on the way.

The question isn't so much whether this will happen as how to do it in a way that strikes the right balance. The financial system needs to be safeguarded without either stifling corporate innovation or encouraging recklessness by corporations who believe they'll be bailed out in a pinch.

"Regulators and policymakers need to catch up with the financial innovation that has occurred over the past 10 years," says Peter Nigro, an economist who has served in the Treasury's Office of the Comptroller of the Currency. "We're behind the curve and I think we have to jump back in front."


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