Paulson: Fed may make more emergency loans in future

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson said on Thursday that the Federal Reserve may need to offer emergency funding to a broader range of financial firms but it is vital to limit it.

"It seems clear that in the future the central bank might need to make liquidity available to a broader range of financial institutions under certain extraordinary circumstances," Paulson told a women's financial group.

"The circumstances...must be limited and focused on systemic risk that can impact the overall economy," he said.

Paulson said the Fed's role in rescuing failing Wall Street investment firm Bear Stearns in March -- the first such action in decades -- meant lawmakers must take a hard look at whether the U.S. central bank has the authority and direction it needs to be a lender of last resort when the financial system is threatened.

At the same time, he warned, it was vital to avoid creating a perception that Wall Street firms could count on being bailed out if they took on excessive risks and got in trouble for it.

"It is imperative that market participants not have the expectations that lending from the Fed is readily available," he said, adding that market discipline should not be undermined by regulation.

Paulson, a veteran of three decades on Wall Street before taking over Treasury in 2006, said the Fed should have "authority to intervene to prevent the buildup of conditions that create significant risk to the stability of the financial system."

That would include giving the U.S. central bank authority to demand quick information from Wall Street firms so it could assess the level of risks they were taking, he added.

(Reporting by Glenn Somerville; Editing by Chizu Nomiyama)