Goldman Sachs Chief Executive LLoyd Blankfein urged policymakers keen to rebuild confidence in financial markets to refrain from creating a system designed solely around protecting us from the 100-year storm.

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 centralized 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 standardized, rather than customized, products whenever possible, he said, adding that customized derivatives should need higher capital requirements.

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

Blankfein suggested that regulators ensure that exposures of a financial institution should be reflected on their balance sheet, abolishing off-balance sheet investment vehicles.

He urged financial firms to use fair value accounting methods to measure potential exposures. By forcing financial institutions to recognize losses immediately, risks to the system would become visible sooner.

Instead, positions were not visible, so they were often ignored -- as were the risks -- until the losses grew to a point that solvency became an issue, Blankfein told bankers.

Regulators needed to be more proactive in talking with market participants about where they see concentrations in risk, and to improve coordination on a national and international level, Blankfein said.

Turf battles between regulators shouldn't be allowed to overwhelm a focus on what's in the system's best interest, Blankfein said.

Anger over compensation was in many respects understandable and appropriate, Blankfein said, adding that Goldman had a clawback tool which let the firm get back some of the bonuses paid if reputational or financial damage ensued.

Multi-year guaranteed employment contracts should be banned entirely. The use of these contracts unfortunately is a common practice in our industry, Blankfein said.

Multi-year contracts are bad for the long-term interests of our industry and the financial system, he said, adding that bankers need to do a better job of understanding when incentives begin to work against the public interest.

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