NEW YORK — Central banks will most likely need to expand their policy kits to prevent growth of potentially damaging asset bubbles, Federal Reserve Governor Daniel Tarullo said Monday.

"The traditional position of most monetary policy makers is that monetary policy itself is an excessively blunt instrument," the central banker said in a question-and-answer session at an event hosted by the Down Town Association.

"Other policy instruments will need to be cultivated to respond to credit conditions" encouraging excessive behavior that could lead to a bust, he said.

"A broader set [of tools] may be appropriate in the future."

Tarullo, appointed to the Fed's board by President Barack Obama in December, focused heavily on his specialist area of regulation in his address. The central banker advocates a flexible system of oversight that harnesses market discipline rather than relying on a fixed regulatory structure.

"There's an overwhelming need for suppleness in the regulatory and supervisory processes we establish," he said. Two major components would be "simple and straightforward rules that can be easily monitored," and incentives to guide market behavior, including a resolution mechanism to prevent banks trusting too heavily in government bailouts, and increased transparency in their operations.

"We need to enlist market discipline more effectively as a supervisory tool," Tarullo said.

Even the most watertight regulatory structure, he said, "will not be a sufficient guard against unanticipated things happening in the future."

For this reason, Tarullo said, the debate over how best to safeguard the financial system should continue beyond the decisions made this year in Washington on regulatory reform.

Part of the ongoing effort to ensure the safety and soundness of financial institutions will be regular repetition of stress tests. But they won't be as exhaustive, nor as public, as the ones the Fed oversaw recently to shore up the capital cushions of 19 major firms, Tarullo said.

"That was an extraordinary dedication of resources," Tarullo said.

The central bank announced Monday that all but one financial firm, GMAC, had fulfilled their additional capital-raising requirements, and the troubled auto financing company would meet its remaining needs with funds from the government's Trouble Asset Relief Program.

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