Goldman warns against regulatory overkill

Although the economic shocks in the wake of the collapse of Lehman Brothers almost a year ago bring about a natural desire for wholesale reform, "taking risk completely out of the system will be at the cost of economic growth," Blankfein said.

"We know from economic history that innovation and the new industries and new jobs that result from it require risk taking," he said in remarks prepared for delivery at a banking conference in Germany's financial capital.

He acknowledged that the financial industry had let the growth and complexity of new instruments "outstrip their economic and social utility as well as the operational capacity to manage them".

But reforms should aim to retain the economically viable attributes of markets while mitigating systemic risk by introducing the right infrastructure and incentives, he said.

Goldman supports a move to bring derivatives out of the so-called "shadow banking" world by trading them on exchanges and clearing the trades via centralised clearing houses.

This would increase transparency for the products that are mostly traded bilaterally and force market participants to enforce margin requirements, he added.

"This will do more to enhance price discovery and reduce systemic risk than perhaps any specific rule or regulation," Blankfein said.

Banks should also seek to use standardised, rather than customised, products whenever possible, he said, adding that customised derivatives should need higher capital requirements.

Some aspects of the market -- such as credit default swaps -- were good, Blankfein said.