Fed mulls more help for investment banks, stronger oversight

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said in prepared remarks for a forum on mortgage lending in Arlington, Virginia.

The comments come in the aftermath of a fiscal crisis in March which saw the Fed take a key role in making sure that the collapse of investment bank Bear Stearns happened in a way which would not cause similar institutions to fail. Bear Stearns avoided bankruptcy when the Fed intervened to facilitate the fire-sale of the floundering firm to rival JPMorganChase.

The Fed has since set up a temporary way to help investment banks and other broker-dealers, called primary dealers, gain sufficient liquidity to meet creditors' demands for repayment of loans. The Fed is now making fully collateralized loans to primary dealers and is also allowing them to borrow Treasury securities using collateral.

Bernanke mentioned other efforts to help investment banks, including collaboration and information sharing with U.S. securities regulators. However he said new laws may be needed to set up better supervision for investment banks and other large securities dealers.

"Strong holding company oversight is essential and thus, in my view, the Congress should consider requiring consolidated supervision of those firms, providing the regulator the authority to set standards for capital, liquidity holdings, and risk management," he said.

Currently, Federal Reserve examiners are in place on a voluntary basis at four investment banks. The Securities and Exchange Commission and Fed are also monitoring conditions at other Primary Dealers, sharing information while working with the institutions to strengthen their businesses.

Bernanke says the current regulatory structure needs to be modernized to deal with the growth of nonbank financial institutions and the development of new financial products.