ORLANDO, Fla. — Policy makers need to address the existence of "too big to fail" financial firms, Federal Reserve Chairman Ben Bernanke said Saturday, calling the problem "pernicious" and an "insidious" barrier to competition.

"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms," Bernanke said at the Independent Community Bankers of America conference in Florida.

Bernanke said the existence of large, systemically risky firms skews competition in the financial services industry, suggesting that the current marketplace "falls substantially short" when it comes to open competition.

"Having institutions that are too big to fail also creates competitive inequities that may prevent our most productive and innovative firms from prospering," he said.

To address the problem, Bernanke reiterated his position that lawmakers should create a way to wind down failing financial firms that are deemed to be systemically risky. U.S. lawmakers are in the process of considering legislation to overhaul regulation of U.S. financial markets, and Bernanke said having an agency to deal with large firms that get into trouble is key.

"The resolution agency should not be allowed to protect shareholders and other capital providers and it should have clear authority to impose losses on debt holders, override contracts, and replace managers and directors as appropriate," he said.

Among the ideas he suggested was a "living will" for systemically risky firms. Requiring firms to develop such a plan is worth considering, Bernanke said, because it would allow regulators a road map to wind down the firm if stresses became too intense.

Bernanke also used the opportunity of speaking to the community bankers to continue the central bank's push to retain oversight of thousands of community banks. Legislation introduced this week by Sen. Christopher Dodd (D., Conn.) would shift much of the Fed's oversight of community banks to the Federal Deposit Insurance Corp.

The Fed has responded by making a public push to retain its authority, and on Saturday Bernanke said the Fed "has always had a special relationship with community banks."

"Close connections with community bankers enable the Federal Reserve to better understand the full range of financial concerns and risks facing the country," Bernanke said.

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