Testifying before the Senate Banking Committee on risk management and systemic risk, Federal Reserve Vice-Chairman Donald Kohn said that while liquidity pressures have eased, the Federal Reserve must protect the markets from a possible relapse.

Kohn said that home loan losses are increasingly significantly and that the commercial real estate market needs to be supervised closely. Kohn added that the Federal Reserve is working closely with financial institutions by providing feedback to banking officials.

"We are ensuring that institutions take a more comprehensive and forward-looking approach to risk management across the entire firm, and are more intensely verifying assertions made by bank management about the robustness of their risk management capabilities," said Kohn.

Kohn explained that as financial institutions grow more complex, regulation will be required.

Kohn said the Federal Reserve will be able to gauge the adequate amount of liquidity and that strengthening liquidity will help guard against extreme events.

Kohn added that despite the crisis, U.S. banks remain well capitalized and that the Federal Reserve's supervisory role complements its other responsibilities.

By Steve Stecyk and edited by Nancy Girgis