Ben Bernanke, Federal Reserve chairman, expressed regret for not being “more straightforward” with Congress in 2008 when he avoided saying that the central bank had no means to save Lehman Brothers.

But, pursuing the Fed’s riposte to the allegations of Dick Fuld, the former chairman of Lehman, Mr Bernanke said that was only out of concern that the full truth could have ratcheted up market pressure on other financial institutions.

Mr Bernanke told Congress shortly after the Lehman collapse that the government had “declined” to rescue the bank. He admitted on Thursday that had “supported this myth that we did have a way of saving Lehman”.

“I regret not being more straightforward there because clearly it has supported the mistaken impression that in fact we could have done something,” he told the Financial Crisis Inquiry Commission, speaking a day after Mr Fuld said the Fed could and should have rescued his group.

Asked what was different at AIG, which has received billions of dollars of government assistance, Mr Bernanke said the group’s insurance business were valuable enough to secure loans to bail-out its troubled financial products division.

“It was our assessment that they had plenty of collateral to repay our loan,” he said. “The rest of the company as far as we could tell was an effective, sound company with a lot of value.“

The FCIC is considering the phenomenon of “too big to fail” institutions like AIG and Lehman whose size and interconnectedness makes a collapse painful for the entire financial system.

Mr Bernanke said that large financial groups played an important role in the economy but he also predicted that the consolidation seen in recent years, which has worried many in the US, could reverse over time.

“My projection is that even without direct intervention by the government, that over time we’re going to see some break up and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures and by regulatory pressures as well,” he said.

Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, said in testimony before the panel that the Dodd-Frank financial reforms passed by Congress in July should help to end the problem.

But she added: “If implementation is not properly carried out, the reforms could be ineffective in preventing future crises or containing financial market disruptions should they occur.”

Ms Bair said the new law should end investors’ belief in “too big to fail”, which gives an implicit government guarantee and thus cheaper borrowing costs to large institutions: “If they think it’s still around they should read the statute itself.”

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