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Market Will Break Up Big Banks, Not Fed: Bernanke

NEW YORK ( TheStreet) -- Calls to break up the big banks are on the rise, but Federal Reserve Chairman Ben Bernanke suggests just leaving it to market forces.

In Congressional testimony Thursday, Bernanke said that post-crisis regulations requiring large banks to hold higher capital and subject them to a greater supervision will "take away the advantage of size."

"Market forces themselves will make it attractive to downsize, rationalize and so on," said Bernanke.

Breaking up big banks remains in the forefront of regulatory debate nearly four years since the crisis, as investors and taxpayers worry about the fallout of the euro debt crisis on American banks in an interconnected world.

JPMorgan Chase's (JPM - Get Report) $2 billion trading loss has also lent fresh ammunition to those calling for banks to split up.

>>Is It Time to Break Up Big Banks?: Poll

The mechanics of doing so remain uncertain, however. Some have suggested bringing back Glass- Steagall Act, repealed under the Clinton Administration, which separated commercial banking operations from investment banking.

Other policymakers remain focused on size, pointing out that banks can expose taxpayers as much through faulty lending as they can through risky trades.

Still, there is no clear agreement on just how banks should be broken up.

"When people talk about breaking up banks, they are not specific," Bernanke noted. "Do they want them to be only slightly smaller, do they want to have a lot of community banks?"

The Chairman went on to add that the creation of the orderly liquidation authority under Dodd- Frank that gives the Federal Deposit Insurance Company the authority to wind down large insurance companies and securities firms along with banks when they fail was one step towards ending the notion of "too big to fail."

He also said that banks being asked to create "living wills" that spell out how they are to be wound up in the event of failure will also help provide more clarity on banks' complex structures. It could also be used to restructure banks.

"One approach would be to ask banks to simplify their structures to avoid these complex situations," Bernanke said.

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