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Bernanke calls for new regulation US seeks to calm investor fears
(about 7 hours later)
The heads of the Federal Reserve and the US Treasury have called for new regulatory powers to shield the economy should a Wall Street firm collapse. The heads of the Federal Reserve and the US Treasury have moved to calm fears about the financial health of the nation's two largest mortgage firms.
Ben Bernanke and Henry Paulson told congress it needed to modernise the regulatory system so it could deal with modern crises. Shares in Fannie Mae and Freddie Mac hit 17-year lows in Thursday trading amid talk of a government bail-out.
Bear Stearns was the most high profile victim of the credit crunch - facing near collapse before it was bought out. Ben Bernanke and Henry Paulson also called for new powers to shield the economy from crises such as the collapse of a Wall Street firm.
The calls came during a hearing of the House Financial Services Committee. They told the US Congress they needed to modernise the regulatory system.
Mr Bernanke said that while current efforts were being concentrated on steadying the state of the US economy, it was not too early to consider measures to ensure the "orderly" liquidation of finance firms on the verge of bankruptcy in the future. Reassurance
Mr Paulson, the Treasury Secretary, and Mr Bernanke, head of the Federal Reserve, told a hearing of the House Financial Services Committee that Fannie Mae and Freddie Mac had adequate capital.
Investors fear the two mortgage firms may need a government bail-out, after comments from a former central banker that suggested the institutions might not be solvent.
Both firms are raising funds to cover losses of more than $11bn (£5.6bn) since the credit crisis began last year.
"Fannie Mae and Freddie Mac are also working through this challenging period," Mr Paulson said.
"They play an important role in our housing markets today and need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalised."
Freddie Mac and Fannie Mae were created by the US government to make it easier for more people to get on the housing ladder.
They were later privatised, but are still known as government-sponsored enterprises and are able to borrow at a lower rate of interest, because markets believe that they would not be allowed to go bankrupt.
Freddie Mac shares slid 22% to $8 and Fannie Mae lost 13.8 % to $13.20 on Thursday.
RecommendationsRecommendations
The Federal Reserve chairman also suggested a more formal process should be established to determine when to use any new powers. Mr Bernanke said that while current efforts were being concentrated on steadying the state of the US economy, it was not too early to consider measures to ensure the "orderly" liquidation of finance firms on the verge of bankruptcy in the future.
He said the Treasury should take a leading role in such a process given the financial implications of a Wall Street firm failing. The Fed was forced to come to the rescue of investment bank Bear Stearns in March, which faced near collapse before it was bought out by JP Morgan in a deal engineered by the central bank.
The Federal Reserve chairman suggested a more formal process should be established to determine when to use any new powers.
He also said the Treasury should take a leading role in any process, given the financial implications of a Wall Street firm failing.
The US already has a defined system in place for dealing with insolvent commercial banks.
Under these regulations, the Federal Deposit Insurance Corporation has powers to act as a receiver for the insolvent bank and to make liquidation easier.
While Mr Bernanke conceded that the method was not directly applicable to investment banks, like Bear Stearns, and would be "complex" to establish, he said it would be "worth the effort".
"By setting a high bar for such actions, the adverse effects on market discipline would be minimised," said Mr Bernanke.
The Treasury should consult with the company's regulator and other authorities, he added.The Treasury should consult with the company's regulator and other authorities, he added.