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 told 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 doing so may give one agency too much power and may also hinder the Fed's ability to set monetary policy.

In that regard, Senate Banking Chairman Christopher Dodd, D-Conn., expressed skepticism about expanding the Federal Reserve's powers to serve as a systemic risk regulator, saying the Fed has failed to protect consumers.

"Whether or not those vast powers will reside at the Fed remains an open question," Dodd said in opening remarks.

Noting the news this morning about the Fed's "ever-ballooning portfolio and its expanding balance sheet which could reach $3 trillion," Dodd suggested Congress must carefully consider if the Fed is the appropriate regulator for the task.

Dodd said while he agrees with Fed Chairman Ben Bernanke that a process should be developed to help resolve failing non-banking firms, it might make more sense to empower the Federal Deposit Insurance Corporation with that authority. Similarly, the panel's top Republican Sen. Richard Shelby of Alabama said "a lot of people have high regard for the FDIC, and so do I." He added he thinks the FDIC has "a great track record" on winding down financial firms.

Meanwhile, Federal Reserve Board Governor Daniel K. Tarullo, testifying Thursday, said 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 creating a systemic risk regulator will not solve all of the financial market's woes.

"We all need to be realistic about what we can achieve collectively in addressing this systemic risk issue," he said during the hearing. "I don't think anybody should be under the illusion that simply by saying systemic risk is important, that we're going to solve" all of the really difficult problems in the markets.

He added that 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.

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