WASHINGTON (Reuters) - Banks that are big enough to destabilize markets should be subjected to tighter regulatory oversight, and some rules ought to be internationally agreed, White House economic adviser Paul Volcker said on Thursday.

Paul Volcker, former chairman of the Federal Reserve Bank and current chairman of the President's Economic Recovery Advisory Board, speaks at the "Emerging from the Financial Crisis" annual conference at Columbia University in New York, February 20, 2009. REUTERS/Chip East

In testimony to the congressional Joint Economic Committee, Volcker added his name to the growing list of U.S. officials saying full nationalization of struggling banks was unlikely. Instead, he said banks will probably need more government help to purge bad assets from their books, and the private sector may end up owning a bigger stake in some firms.

The former Federal Reserve chairman and close adviser to President Barack Obama faulted regulators for missing warning signs that financial firms were assuming too much risk, and called for “substantial changes” in oversight.

“We must not again leave the markets so vulnerable that a breakdown will again threaten the national and world economies,” said Volcker, the former Federal Reserve chairman who now heads up President Barack Obama’s Economic Recovery Advisory Board.

His suggestions for regulatory reform included subjecting large banks to “particularly high” international standards for safety and soundness.

Trading and transaction-oriented firms that operate primarily in capital markets could be less intensively regulated. However, for those firms that are big and complex enough to be systemically important, capital, leverage and liquidity requirements should be imposed.

“Implicit in this approach is the need for strong cooperation and coordination among national authorities and regulators,” he said.

“Some approaches -- accounting standards, capital and liquidity requirements, and registration and reporting procedures -- should be internationally agreed and consistent,” he added.

NO FULL NATIONALIZATION

Volcker said banks probably need government help to rid themselves of money-losing loans that are difficult to value or sell. He raised the possibility of a publicly funded “bad bank” to house the bad assets, an idea that has been widely discussed but was not part of the bank rescue plan that Treasury Secretary Timothy Geithner sketched out earlier this month.

Geithner instead proposed a public-private partnership to buy up bad assets. Volcker, when asked whether he thought Geithner’s approach was correct, said what Geithner laid out was “so general” that he could not make a judgment.

That has been a common complaint of Geithner’s plan, which envisions buying up as much as $1 trillion in bad assets but does not spell out exactly how it would work, or what portion of the money would come from taxpayers.

Volcker said the current financial crisis grew out of serious and unsustainable imbalances in the U.S. and world economy, and economic policy going forward must take “appropriate measures” to deal with that problem.

He said risk management failed on Wall Street, and “lapses in financial regulation and supervision ... permitted institutional weaknesses to fester.”