Bernanke, Paulson testimony on regulatory reform

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson testified on Thursday before the House Financial Services Committee.

Following are highlights from their testimony on regulatory restructuring:

Bernanke in prepared testimony on need for legislation:

"Legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers. ... Congress should consider requiring consolidated supervision of those firms and providing the regulator the authority to set standards for capital, liquidity holdings, and risk management."

Paulson in prepared testimony on need for regulatory reform:

"We will need to give our regulators additional emergency authority to limit temporary disruptions. These authorities should be flexible, and to reinforce market discipline the trigger for invoking such authority should be very high, such as a bankruptcy filing. Any potential commitment of government support should be an extraordinary event that requires the engagement of the Treasury Department and contains sufficient criteria to prevent costs to the taxpayer to the greatest extent possible."

Bernanke in prepared testimony on need for regulatory authority:

"Because robust payment and settlement systems are vital for financial stability, the Congress should consider granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems."

Bernanke in prepared testimony on financial turmoil:

"The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning. It is not too soon, however, to think about steps that might be taken to reduce the incidence and severity of future crises."

Paulson in question and answer session on value of the dollar:

"We want a strong dollar. ... I believe these long-term fundamentals are going to be reflected in the value of our currency."

House Financial Services Chairman Barney Frank saying Republicans on the committee have been "asking for a hearing on what's being done by you two gentlemen (Bernanke and Paulson) -- the letter suggested not enough -- to protect our currency and particularly to focus on its relationship to oil prices."

"So the request that the minority has made for that hearing is going to go forward. ... We will have it before we break in August."

Bernanke in question and answer session on government-sponsored enterprises:

"I think they could do an even better job if they were better supervised and better capitalized."

Paulson in question and answer session on regulation of GSEs:

"Let's get GSE reform legislation done. ... Let's have a strong independent regulator that will inject confidence into those institutions and markets."

Bernanke in question and answer session on the price of oil:

"It does take a bit of time for the oil price increases to feed to the consumer. So when oil prices go up it takes a bit of time before it shows up at the pump, and so for the next couple of months, we would expect to see the headline inflation rate rising."

Paulson in question and answer session on the price of oil:

"I really think the price of oil is being driven by supply and demand factors.

There really is no short-term solution."

Bernanke in question and answer session on the Fed's primary dealer credit facility:

"At some point we would have to phase it out when we felt the system had sufficiently recovered."

Paulson in prepared testimony on Bear Stearns:

"The Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline."

Paulson in prepared testimony on need to give Fed more authority:

"Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk. But the Fed does not have the clear statutory authority nor the mandate to do this."

Paulson in question and answer session on Fed as a regulator:

"The role for the Fed as the macro stability regulator will take time to think through. It's a complex question. It's an important question. ... Even more pressing ... is the issue of the resolution process and procedures for complex financial institutions that aren't federally insured."

Bernanke in question and answer session on cooperation:

"I think for the time being that the most likely outcome and the expectation is that we will continue to work in a creative way together."

Paulson in question and answer session on risk and leverage:

"A lot has taken place since the last stress we had in the market, 1998, and this current period. We're seeing a number of these institutions and securities are performing under stress for the first time.

"I believe that the biggest problems that we are dealing with is not the diversification of these organizations, but is the amount of risk that was taken on and the amount of leverage. It was much greater than was understood because a lot of it was taken on ... complex products that were difficult to understand."

Bernanke in question and answer session on derivatives:

"The Federal Reserve is very much involved in this process to make the post-trade, clearing and settlement process, the management of the risks associated with this, the transparency, the standardization (more efficient). ... This is a very high priority for us."

Paulson in question and answer session on derivatives:

"These contracts have done a lot to make the markets more efficient."

Bernanke in question and answer session on whether the Fed could afford to extend a loan to another failing investment bank:

"There's plenty of balance sheet room left. I don't visualize that as a constraint in the near term."