Federal Reserve Board Governor Daniel K. Tarullo told lawmakers Thursday he believes a new systemic-risk regulator should complement and not trump existing regulators' day-to-day oversight of large financial institutions.

In prepared testimony before the Senate Banking Committee, Tarullo laid out the Fed's latest thinking on how Congress should rewrite the country's financial regulatory framework.

"It seems most sensible that the role of the systemic risk authority be to complement, not displace, that of a firm's consolidated supervisor," Tarullo said. "Under this model, the firm's consolidated supervisor would continue to have primary responsibility for the day-to-day supervision of the firm's risk-management practices, including those relating to compliance risk management, and for focusing on the safety and soundness of the individual institution."

In addition to the creation of a systemic risk regulator, Tarullo said other steps must be taken to ensure the safety and soundness of large non-banking institutions. This should include broadening existing framework of consolidated supervision over banking institutions to large non-banking firms as well, he said.

"The board believes there should be statutory coverage of all systemically important financial firms - not just those affiliated with an insured bank as provided for under the Bank Holding Company Act of 1956," Tarullo said.

"The current financial crisis has highlighted a fact that had become more and more apparent in recent years - that risks to the financial system can arise not only in the banking sector, but also from the activities of financial firms that traditionally have not been subject to the type of consolidated supervision applied to bank holding companies."

Tarullo's comments Thursday come as Congress is gearing up to restructure the country's financial regulatory framework. Some lawmakers are seeking to dub the Fed the new systemic risk regulator, but critics fear that doing so may give one agency too much power and may also hinder the Fed's ability to set monetary policy.

Tarullo on Thursday reiterated comments made earlier this month by Fed Chairman Ben Bernanke, saying it would make sense for the Fed to play some type of role in overseeing systemic risk.

Tarullo also repeated the Fed's call for a mechanism to wind down financial companies other than banks if they pose dramatic risks to the economy.

"The United States needs improved tools to allow the orderly resolution of systemically important nonbank financial firms, including a mechanism to cover the costs of the resolution if government assistance is required to prevent systemic consequences," he said.

Among other areas where the Fed has cited the need for additional risk oversight is in the over-the-counter derivatives market. The Fed has played a leading role in working with the private sector and other regulators to develop centralized clearing for credit-default swaps, an exotic financial instrument that many say contributed to the near-downfall of American International Group Inc. (AIG).

The Fed will serve as the primary regulator for IntercontinentalExchange Inc.'s (ICE) new clearinghouse, but Tarullo said he believes Congress needs to extend the Fed's authority over payment and settlement systems.

"Currently, the Federal Reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks."

   -By Sarah N. Lynch and Maya Jackson-Randall, Dow Jones Newswires; 202 862-6634; sarah.lynch@dowjones.com