Federal Reserve Chief Ben Bernanke said on Wednesday in a speech in New York that financial regulators must prioritise market stability as he warned that failure of interwoven financial companies could dislocate the financial system and the economy as a whole.

Apart from their usual role of safeguarding individual institutions, Mr Bernanke said that regulators could serve well by focusing on the activities of large and complex financial firms as their failure could disrupt critical financial infrastructures, such as payments and settlements systems, where costs to be incurred could be far greater than costs to be imposed on owners and participants.

He said that regulatory agencies need to be on top of financial institutions and critical infrastructures "with an eye toward overall financial stability as well as the safety and soundness of each individual institution and system."

Mr Bernanke said that the collapse of Lehman Brothers in 2008 is a glaring example of the futility of training too-narrow focus on individual institutions or systems which could blindside the regulators' ability to detect and prevent mounting threats to financial stability, which in turn could affect a great number of firms or even markets.

He said that it is crucial that all systemically important financial firms are subjected to consolidated supervision and governments need to impose market discipline in handling a problematic company "by ensuring that shareholders and creditors incur losses and that culpable managers are replaced while at the same time cushioning the broader financial system from possibly destabilizing effects of the firm's collapse."

Mr Bernanke said that governments must posses credibility in resolving issues of failing firms and when companies are allowed to go down, such credibility should erase the perception that some firms are too big to fail.

He revealed that the US Congress is poised to introduce financial reforms that would pave the way for such resolution regime and the challenge ahead is to muster the required international cooperation in implementing the cross-border aspects of the legislative measures.