Dec. 8 (Bloomberg) -- Federal Reserve Governor Randall Kroszner urged banks to hold more reserve capital to protect themselves from future “cascading losses,” as potential market fixes are “no guarantee” against another credit crisis.

Banks can strengthen safeguards by restructuring trading contracts with additional or different collateral, conducting “stress tests” and increasing trading on “more organized exchanges,” Kroszner said today in a speech in Geneva.

Still, he said such market improvements may not be enough, as central bankers in the U.S. and other countries try to prevent a repeat of the credit meltdown that’s caused almost $1 trillion in worldwide writedowns and losses in two years. The Fed and other regulators must improve their own oversight of institutions’ financial risks, he said.

“Banks should hold higher liquidity and capital buffers, since the enhancements I just noted are still no guarantee against future market distress that could cause correlated and cascading losses among market participants,” Kroszner said in prepared remarks to the ICBI RiskMinds 2008 Conference.

“Now is the time for banks to establish good risk management policies addressing the issues I have just discussed, so that strong risk discipline is codified,” he said.

Kroszner, on leave from his post as a University of Chicago economics professor since joining the Fed in 2006, didn’t comment on the outlook for interest rates or the U.S. economy in the speech. The Federal Open Market Committee, which decides the central bank’s benchmark rate, next meets Dec. 15-16.

Eric Rosengren, president of the Boston Fed bank, is scheduled to speak today at the same conference.

Mortgages Soured

Financial institutions have reported $978 billion in losses and writedowns since the start of 2007 stemming from home loans and mortgage securities that soured after the collapse of the U.S. subprime mortgage market. Excessive risk taking led to record foreclosures, the worst credit crisis in seven decades and a U.S. recession, with unemployment rising to 6.7 percent.

Companies have raised $872 billion of capital in response to the losses, according to Bloomberg calculations.

For financial-market functioning to improve, some securities “have to become simpler and more transparent,” Kroszner said. “Product complexity and a lack of transparency are at the root of many of the problems that have emerged, especially in the markets for securitizations and structured credit products.”

Another issue is “rating triggers,” or clauses that require payment when a company’s credit rating is downgraded, Kroszner said. When used widely, they can intensify turmoil, with losses triggering downgrades and the need to post collateral or sell assets, he said. “Recent events have demonstrated this potentially destabilizing dynamic at work,” Kroszner said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: December 8, 2008 02:30 EST