By Greg Robb

WASHINGTON (Dow Jones) -- Federal Reserve Board Chairman Ben Bernanke stressed Tuesday that major financial institutions would not be allowed to fail given the fragile state of financial markets and the global economy.

In a speech in Washington, Bernanke repeated that a sustainable economic recovery will "remain out of reach" until the banking sector is stabilized.

A recovery later this year is not out of the question, Bernanke said.

If efforts by the Fed and the Obama administration can get the banks back to being reasonably stable, "then I think there is a good chance the recession will end later this year and 2010 will be a period of growth," he said.

In the end, the economy is bound to recover, he said. The only question is how quick.

The central bank is not anticipating deflation, he said.

But Bernanke zeroed in on the question of big banks, the fate of which has been hovering over financial markets.

The continued viability of systemically-important financial institutions is "vital" to the recovery, Bernanke said in a speech to the Council of Foreign Relations.

"We have reiterated the U.S. government's determination to ensure that systemically important financial institutions continue to be able to meet their commitments," Bernanke said.

Some senior Republican members of Congress, including 2008 Republican presidential candidate John McCain, and even one president of a regional Fed bank, have recently called for the government to pull back from assisting large financial institutions.

They are worried that the government is throwing good money after bad in propping up these troubled institutions, including Citigroup and American International Group (AIG).

"Close them down, get them out of business. We've got to bury some big ones and send a strong message to the market," Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said on ABC News over the weekend.

Bernanke's comments could be viewed as a forceful rebuttal to Shelby and McCain, analysts said.

Bernanke said he hopes the view that the market can handle the failure of a systemically important firm is "no longer seriously maintained" given the power of the financial crisis in the wake of the collapse of Lehman Brothers and the government takeover of Fannie Mae and Freddie Mac last September.

"It was the...collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great," he said.

Increasing the oversight

The Treasury and Fed are not sitting still, but instead are stepping up oversight of critical firms, Bernanke said.

"We are already beginning significant work in terms of strengthening the systemically-critical firms," Bernanke said.

There was a sense of regret from Bernanke that some firms have become too interconnected to fail but also a sense that the government had no choice.

The money that has gone into banks has already had "beneficial results," Bernanke said.

Bernanke met with President Obama and his top economic advisors on Monday behind closed doors to discuss the economic outlook and the financial market crisis. The Obama team has yet to spell out important details of how a public-private partnership will remove toxic assets, primarily mortgage securities, off the balance sheets of banks.

Administration officials said the details could come within a few weeks.

White House spokesman Robert Gibbs said Obama is pleased with the coordination between Treasury and the Fed in response to the crisis. Bernanke said he didn't expect any "major disagreements" with Treasury over the repair of the financial system.

The bulk of Bernanke's address included a summary of his thinking about how to improve the regulation of financial markets. He spent some time describing the idea of one systemic regulator to oversee the entire financial market looking for signs of stress.

Many members of Congress want the Fed to take that new role but Bernanke played it coy and said the issue would have to be solved down the road and depended on what Congress had in mind.

Bernanke said the U.S. regulators failed in their duty to maintain a stable financial system leading up to the crisis, but added that the "details of the story are complex."

Bernanke said Congress should give the Fed authority over critical Wall Street payment-and-settlement systems.

The Fed chairman suggested that regulators need to examine mark-to-market accounting during financial crises, but rejected calls for immediate suspension of the rules.

Mark-to-market requires banks to set their holdings at market prices. Critics argue that this is impossible when some markets dry up.

In general, it is a good idea for banks to use mark-to-market, he said. However, in periods of crisis, this accounting treatment can be misleading, he said.