Chairman Bernanke is trying to define which financial institutions it’s safe to let fail. The longer it takes him to decide, the tougher the decision becomes.

In the year since credit markets seized up, the Federal Reserve chairman has repeatedly expanded the central bank’s protective role, turning its balance sheet into a parking lot for Wall Street’s hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.

The lack of clearly defined limits may put the Fed’s independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.

“There is some hard thinking that needs to be done,” the president of the Philadelphia Federal Reserve Bank, Charles Plosser, said in an interview last week. “The Fed has a terrific reputation as a credible institution. We have to be cautious not to undertake things that put that credibility at risk.”

The expanding role of central banks will be the hottest topic in the room when Mr. Bernanke addresses his counterparts from around the world at the Kansas City Fed’s Jackson Hole, Wyo., symposium August 22.

Since taking on $29 billion in Bear Stearns Cos. assets to facilitate the failing firm’s takeover by JPMorgan Chase & Co., Mr. Bernanke has made several moves that imply further expansion of the central bank’s mission.