Bernanke: Credit markets strained, capital helping

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday that credit markets, while stabilizing, remain under serious strain and government capital injections into banks are needed to help restore normal lending.

"There are some signs that credit markets, while still quite strained, are improving," he said in testimony prepared for delivery to the House of Representatives Financial Services Committee.

Treasury Department injections of capital into financial institutions using its $700 billion Troubled Assets Relief Program funds would be critical for restoring confidence and promoting the return of credit markets to more normal functioning, he said.

Bernanke also said the Treasury's ability to take any actions that might be needed to prevent the failure of a systemically important financial institution would be an important part of restoring confidence and healing markets.

"The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical steps toward restarting flows of credit," he said.

Bernanke appeared on a panel with Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp Chairman Sheila Bair to discuss government efforts to help the stalling U.S. economy, which has been slammed by the collapse of housing markets and a credit crisis.

Credit conditions remain "far from normal," Bernanke said, citing elevated risk spreads and tighter bank lending standards through October.

"There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks," he said.

Bernanke reminded banks that authorities expect them to use their improved access to capital for extending loans.

"It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness," he said.

(Reporting by Mark Felsenthal, Editing by Tom Hals)