Highlights: Geithner's testimony to Senate Banking panel

WASHINGTON (Reuters) - The following are highlights from testimony by U.S. Treasury Secretary Timothy Geithner and reactions from senators on Thursday at the Senate Banking Committee hearing on regulatory reform.

GEITHNER ON WHETHER IT WOULD MAKE SENSE TO BAR PEOPLE INVOLVED IN REGULATORY OVERHAUL FROM BECOMING FED CHAIRMAN:

"No, I don't think that would be appropriate nor do I think that would be necessary."

GEITHNER ON FINANCIAL OVERSIGHT COUNCIL:

"We are giving the council the power to collect information, the responsibility to look across the system and the power to recommend changes, but not the power to compel or force changes because that would fundamentally change and qualify the underlying statutory responsibilities of those agencies and I think that would create the risk of more confusion and less accountability, frankly. But you know that's a difficult balance to get, I'm not sure we got the balance perfect, but I think that to invest in a committee, responsibility to force those kind of changes would I think lead to more diffusion of accountability and more uncertainty."

GEITHNER ON CUTTING U.S. BUDGET DEFICIT:

"A critical part of getting recovery in place is going to be to convince the American people and investors around the world that we are going to have the will, working with Congress, to bring those deficits down over time."

"We started with a deficit in the range of 10 percent of GDP when we came into office ... and the additions we have made, proposed with the Congress to get us out of recession will modestly contribute to those deficits and we believe they were necessary to avoid the risk of a deeper recession and even higher future deficits."

GEITHNER ON FED NEEDING TREASURY APPROVAL FOR LENDING:

To require the Fed to seek Treasury approval to lend to firms it has no supervisory authority over "is an important change; but we believe -- at least the chairman of the Federal Reserve believes -- that is a very appropriate and justifiable change, in part because of the concerns expressed by many of your colleagues, understandably, about the Fed being pulled into doing things that go well beyond its classic responsibilities of being the lender of last resort.

I think it is a very consequential act for the Fed to lend to an institution that it has no supervisory relationship over. It creates an enormous risk of moral hazard. To limit that authority in the future is a way to help reduce the risk of moral hazard, by the exceptional response the government's made in this case."

GEITHNER ON EXTENDING TARP AUTHORITY PAST DEC 31

"I haven't made that judgment yet and I don't think we are in a position to make that judgment. There are some important signs of stability, some important signs of healing in the financial sector, but I think it's too early, premature to make that judgment."

GEITHNER ON CLOSING BANKING LOOPHOLE FOR INDUSTRIAL LOAN COMPANIES:

"Institutions that do things that are basic banking activities, they transform short-term liabilities into long-term assets, need to come within a common framework of standards and restraints and oversight. If we do not do that then all the risk in the system will migrate to those parts of the system where you can do similar activities but not be subject to the same basic standards. So our basic principle is a simple one. We want to eliminate those gaps and loopholes that allow institutions to evade those basic standards."

GEITHNER ON FED INDEPENDENCE, OVEREXTENSION

"It is very important ... that the Fed preserve its independence and accountability for achieving sustainable growth and price stability over time. At its inception, the Fed was given this mix of responsibilities, both for price stability and for a range of responsibilities that stray into the area of financial stability -- it is the lender of last resort to the country. I don't believe there is any conflict between those two responsibilities. I think the record of the Fed justifies that judgment. But we want to preserve that.

In part because of that, being careful that we make sure that the Fed isn't overextended, we're scaling back some of their responsibilities even as we tighten accountability and responsibility in those core areas."

GEITHNER ON PRESERVING FED INDEPENDENCE:

"We are very committed, and it is very important, that we preserve the independence of the Fed, and its basic credibility of its responsibilities for monetary policy. And we would not recommend proposals that would limit or put that at risk in some sense because that is important to any effort to build a well-functioning economy in the future. If we lose that credibility, that would be very damaging."

GEITHNER ON FUTURE ROLE OF GSES

"Fannie and Freddie were a core part of what went wrong in our system. Congress did legislate last year a comprehensive change in oversight regime and just to be fair, we did not believe we could in this timeframe lay out central or federal reforms to guide or determine what their future role should be after the crisis. We want to do that carefully and well. We are going to begin a process of looking at broader options for what their future should be and what the future role of those agencies in the housing market will be.

GEITHNER ON GIVING THE FED MORE RESPONSIBILITY

"Central banks everywhere and in this country are vested with the dual responsibility for both monetary policy and some role in systematic financial stability. That's true here and it's true everywhere. There is no necessary conflict between those two roles. For the example, the Fed has an exemplary record of keeping inflation low and stable for the last 30-years even though it had these kind of responsibilities you have outlined that take it into the area of financial stability. So I see no conflict. The second point I want to make is the following. If you look at the experiences of countries in this crisis, who have taken away from their central banks and given those responsibilities for financial stability and supervision to other agencies -- I think they found themselves in a substantially worse position that we did as a country. A worse crisis, with more leverage in the banking system, less capacity to act when the crisis was unfolding. Our proposal for additional authority within the Fed are actually modest and build on their existing authority.

SENATOR RICHARD SHELBY ON FED ACCOUNTABILITY:

"With decision-making authority dispersed to the (Fed) Board and the reserve banks, who will be accountable to Congress for the systemic risk, regulation function, as the 'system' cannot appear to testify right here before Congress?"

GEITHNER ON NOT BANNING INDIVIDUAL FINANCIAL PRODUCTS:

"I know that some suggest we need to ban or prohibit specific types of financial instruments. ... In general, however, we do not believe you can build a more stable system based on an approach of banning on a periodic basis individual products because those risks will simply emerge quickly in new forms. Our approach is to let new products develop, but to bring them into a regulatory framework with the necessary safeguards in place."

SHELBY ON FED STRUCTURE, ROLE AS REGULATOR:

"I do not believe we can reasonably expect the Fed or any other agency to effectively play so may roles. In addition, the Federal Reserve was provided a unique, independent status to ensure world ... markets that monetary policy will be insulated from political influence."

"The structure of the Federal Reserve involves quasi-public reserve banks that are under the control of boards with members selected by banks regulated by the Fed. By design, the board and the reserve banks are not directly accountable to Congress and are not easily subject to congressional oversight. Recent events have clearly demonstrated that the structure is not appropriate for a federal bank regulator, let alone a systemic regulator.

GEITHNER ON CONSUMER PROTECTION:

Consumer protection is a critical foundation for our financial system. It gives the public confidence that financial markets are fair and enables policy makers and regulators to maintain stability in regulation. Stable regulation, in turn, promotes growth, efficiency, and innovation over the long term.

GEITHER ON REGULATION OF HIGHLY LEVERAGED FIRMS:

Under our proposals, the largest, most interconnected, and highly leveraged institutions would face stricter prudential regulation than other regulated firms, including higher capital requirements and more robust consolidated supervision. In effect, our proposals would compel these firms to internalize the costs they could impose on society in the event of failure.

(Washington newsroom 202-898-8310)