U.S. needs financial regulatory overhaul: officials

By Mark Felsenthal and Glenn Somerville

WASHINGTON (Reuters) - Policy-makers said on Thursday they were doing everything possible to restore calm to financial markets, but stressed to lawmakers that a longer-term regulatory overhaul was vital to avert future crises.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress they agreed the Fed needs a stronger hand in supervising investment banks to help shield the broader economy from problems like the ones that forced the emergency rescue of investment bank 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"The Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market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 told Congress.

"We should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions ... and the tools to intervene to mitigate systemic risk in advance of a crisis," he said.

Bernanke, in testimony before the same House Financial Services hearing, said authorities were doing everything possible within their existing authority to settle markets roiled by a credit crunch.

NEED TOUGHER SCRUTINY

But he said stricter oversight was needed to supervise large investment banks and primary dealers that trade securities directly with the Fed, in light of the disruptions that have battered the U.S. economy.

"Cooperation between the Fed and the SEC (Securities and Exchange Commission) is taking place within the existing statutory framework with the objective of addressing the near-term situation," Bernanke said in comments that echoed a speech he gave on Tuesday.

"In the longer term, however, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers," he said.

Bernanke added that regulatory standards for capital and risk should reflect the differences between investment banks and commercial banks.

Both policy-makers agreed that, with presidential elections on the horizon, it was unlikely that regulatory reforms could be pushed through this year. But they vowed to continue looking for solutions to restore market stability.

CAN HANDLE CRISIS

The officials said they could not rule out a further financial crisis, but could deal with one with existing tools. Paulson said regulators should get emergency authority to step in to limit temporary disruptions to financial markets.

But the bar for using such power should be high, he said.

"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," he added.