Highlights: Bernanke, Volcker testimony on banking regulation

WASHINGTON (Reuters) - The following are highlights from a House Financial Services Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke and White House adviser Paul Volcker testifying on regulation of the financial services industry.

BERNANKE ON FANNIE, FREDDIE DEBT 'GRANDFATHERED'

"My assumption is that some time soon, I hope soon, that Congress will reform Fannie and Freddie, perhaps break them up, perhaps make them officially governmental. At that point, then there will have to be decisions made about whether the government is going to stand behind their securities and if so, in what way. My assumption is that the mortgage-backed securities which are already outstanding will be grandfathered and will retain the U.S. government backing that they currently have."

BERNANKE ON WHETHER DEBT OF FANNIE, FREDDIE IS SOVEREIGN DEBT

Bernanke: "My interpretation is that the government is standing behind the (GSEs)... "

Rep. Scott Garrett: "But do you think it is sovereign debt?"

Bernanke: "Whether it is legally sovereign debt or not, I am not equipped to tell you. I don't know."

VOLCKER ON CONSUMER PROTECTION:

"I think you can separate consumer protection from safety and soundness. I think there is some overlap... but by and large I think they are distinct enough that you can separate it."

BERNANKE ON BEING REGULATOR OF BIG BANKS ONLY:

"We are very concerned about being the regulator of only the big banks. We think that's a bad idea. We need to see the broad financial system, we need to have the information about the broader economy, we need to know what is going on across the country, not just in the great state of New York, for example. There is a close connection between the need for the Federal Reserve to look at banks of all sizes and our regional structure. We have policymakers drawn from twelve districts around the country to speak to local people, including local bankers and get information about what's happening in their part of the country. The regional structure of the Federal Reserve and the supervision of small and medium-sized banks, both of those things together provide us with qualitative information which cannot be obtained any other way."

BERNANKE ON STRONG FOREIGN DEMAND FOR U.S. TREASURIES:

"This is a very large and deep market, when we see stress in other areas around the world... perhaps in other countries' fiscal positions, for example, the dollar tends to strengthen because money flows into U.S. Treasuries. I have not seen any reduction in demand for U.S. Treasuries. Foreign demand remains quite strong. I don't anticipate any problem. I guess there is always the question of price. There the question is will all our creditors including domestic creditors remain confident in longer-term fiscal stability of the United States. There I think it's very very important for the Congress to be devising a plan to create a trajectory whereby we have a more stable debt position going forward. That is very important."

VOLCKER ON NEED FOR MANDATORY BAN ON PROPRIETARY TRADING:

"The House bill has a provision, and it's voluntary. That just turns it over to the regulators and the supervisors.

In my opinion, it's very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it's too late. That's why you want it in legislation."

BERNANKE ON WANTING POWER OVER ALL SIZE BANKS, NOT JUST BIG ONES:

"We are quite concerned by proposals to make the Fed a regulator only of the biggest banks, making us essentially the too big to fail regulator. We don't want that responsibility. We want to have a connection to Main street as well as to Wall Street. We need to have insight in what is happening in the entire banking system, to understand how regulation affects banks, to understand the...credit problems of banks at all levels and all sizes. And smaller and medium-sized banks are very valuable to us and they provide irreplaceable information, both in terms of making monetary policy and in terms of understanding the economy, but also in terms of our financial stability.

VOLCKER ON SENATOR DODD'S VOLCKER RULE:

"I do think the Dodd bill takes a big step forward. There may be a few areas where I think additional clarification may be desirable... I do think that it's got to be mandatory because I have been a regulator or a supervisor... and it's very hard to take tough restrictive measures before the crisis. And after the crisis, of course, it's too late. I really think that in an area like this where the rational is... quite clear, the rule should (be as specific and mandatory) as possible. I think the Dodd bill, as I understand it, goes considerably in that direction."

VOLCKER ON NEED TO HAVE PROPER REFORM:

"This (Lehman Brothers collapse) is an example of why we need thorough reform so that an institution of that size will have some official oversight. But I would also hope that if we have the kind of reform being talked about, the issue of the Federal Reserve lending to those institutions, non-bank institutions, would not be relevant because if push came to shove and they were failing, they would come under the so-called resolution authority, that would have the power and resources to provide a suitable liquidation or merger of that institution. So the Federal Reserve wouldn't have to get directly involved with a lending organization. We want to assist them so that they would not be put in that dilemma"

BERNANKE ON BENEFITS OF A SYSTEMIC RISK COUNCIL:

"The other thing we learned from the crisis at the very highest level is the need to look at the system from a systemic perspective, not just look at each individual firm but to look at broad risks to the whole system. I think that some of the ideas which have been advanced in the House bill and in Sen. Dodd's proposal such as creating a systemic risk council, broadening the responsibilities of some of the regulators, would help to address that problem. Together with tougher regulations like higher capital standards I think that would improve our oversight considerably."

BERNANKE ON FED'S ROLE AS BANK SUPERVISOR:

"The Federal Reserve is uniquely suited to supervise large, complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole."

BERNANKE ON HOUSE LEGISLATION:

"The legislation passed by the House last December would preserve the supervisory authority that the Federal Reserve needs to carry out its central banking functions effectively."