Bair told Reuters TV on Thursday that regulators need to accept blame for not catching the trading debacle and said it shows that some banks are too big to manage.

But she said all the attention being paid to the trading loss is distracting from pressing issues such as the deteriorating European debt crisis.

"I don't frankly like the piling on. They made a big mistake I think it proves my point these banks are too big and too complex to centrally manage," said Bair, who last year left her post as chairman of the Federal Deposit Insurance Corp.

"But at the end of the day it was not any kind of loss that would threaten the viability of the bank, and they do need to be focused on unwinding those positions and also focusing on Europe."

Bair is launching a new private-sector group called the Systemic Risk Council to try to accelerate reforms and monitor the work of financial regulators.

Her comments come a day after JPMorgan Chief Executive Jamie Dimon testified at a congressional hearing called to examine the failed hedging strategy that has produced at least $2 billion in losses.

While the tone of the hearing was largely cordial, the trading loss itself has attracted huge attention, with some commentators calling for a return to the Glass-Steagall Act that previously separated commercial and investment banks, and critics wondering if any lessons have been learned from the 2007-2009 financial crisis.

Bair expressed distaste for hyperbolic interpretations of what happened, but she did say it exposed flaws in how big banks are policed.

"I think the regulators missed this," she said. "I think it would be refreshing if they would admit they'd made a mistake."

The Federal Reserve and the Office of the Comptroller of the Currency have come under scrutiny for not raising red flags earlier about the massive hedging strategy that went awry, despite having more than 100 examiners embedded at JPMorgan.

So far they have not been apologetic and said they are still investigating what happened.

Bair said it is especially concerning considering that press reports started in early April that a London-based JPMorgan trader, nicknamed the 'London Whale', had amassed an outsized position that prompted hedge funds to bet against it.

The trading position started in January and was related to bets on corporate debt using credit default swaps (CDS).

"They shouldn't have to look at every single trade but these were very, very large positions," Bair said about regulators' responsibility to catch the trades. "It didn't take a rocket scientist to figure out that CDS indices are very thinly traded and heavily dominated by big players."

Thomas Curry, who heads the OCC, told lawmakers last week that his agency's examiners started talking with JPMorgan about the trading position in April.

He said they were evaluating the trade when the value of the position started deteriorating rapidly at the end of April and early May.

"The regulators should have been aware of this, and it's surprising to me that they weren't," Bair said.

(Reporting By Karey Wutkowski; Editing by Tim Dobbyn)

• A Permanent Economic Emergency