U.S. federal regulators Thursday told lawmakers that simply creating a new systemic risk regulator to monitor the broad U.S. financial system is not a cure-all and highlighted the need for Congress to boost existing regulatory gaps.

A new systemic risk regulator "is not a panacea," Federal Deposit Insurance Corp. Chairman Sheila Bair is expected to tell the Senate Banking Committee Thursday.

In her prepared testimony Bair warned Congress to move carefully on ambitious efforts to create a new systemic risk regulator and said it might be better for lawmakers looking to modernize financial regulations to focus on boosting regulators' existing authorities.

"Changes in our regulatory and supervisory approach are clearly warranted, but Congress should proceed carefully and deliberately in creating a new systemic risk regulator," she said. "In addition, changes that build on existing supervisory structures and authorities - that fill regulatory voids and improve cooperation - can be implemented more quickly and effectively."

Bair's comments come as Congress is gearing up to restructure the country's financial regulatory framework. Some lawmakers are seeking to dub the Federal Reserve 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.

Federal Reserve Board Governor Daniel K. Tarullo, who will also testify Thursday, said in his prepared testimony that a new systemic-risk regulator should complement and not trump existing regulators' day-to-day oversight of large financial institutions.

"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."

Like Bair he suggested that creating a systemic risk regulator will not solve all of the financial market's woes. He 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, echoing comments by Fed Chairman Ben Bernanke, said it would make sense for the Fed to play some type of role in overseeing systemic risk. He 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.

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.

Proving how difficult it might be for lawmakers to agree on a plan for revamping market regulations, John C. Dugan, the Comptroller of the Currency, made some suggestions in his prepared remarks for regulatory reform that could likely incite turf battles among the various federal and state regulators.

He advocated giving banking regulators the primary task of ensuring consumer protection, noting that prudential supervisors are best-suited to protect consumers because of their examination processes. Such a move could evoke tensions with the Securities and Exchange Commission, whose main mission is to protect investors.

-By Maya Jackson Randall and Sarah Lynch, Dow Jones Newswires; 202-862-9255; maya.jackson-randall@dowjones.com