WASHINGTON (MarketWatch) -- The Federal Reserve should have a much larger role in supervising investment banks to prevent and limit financial market turmoil, Federal Reserve Chairman Ben Bernanke said Tuesday, endorsing an expansion of the central bank's authority into new territory.
"Holding the Fed more formally accountable for promoting financial stability makes sense only if the institution's powers are consistent with its responsibilities," Bernanke said.
Congress should consider giving the Fed power to set standards for capital liquidity holdings and risk management for investment banks, as it now does for commercial banks, Bernanke said. Already, the Fed has offered to be the lender of last resort for the investment banks. Read his prepared remarks.
In the past, the Securities and Exchange Commission has been the primary regulator of broker-dealers.
Bernanke's remarks come two days before he and Treasury Secretary Henry Paulson testify at the House Financial Services Committee on suggestions for shoring up the weaknesses of the federal financial regulatory structure that have been exposed in the meltdown of the housing and credit markets.
Bernanke said the Fed is considering extending its emergency loans to broker-dealers beyond 2008.
"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," he said.
In March, as market conditions worsened, the Fed established two lending facilities for primary dealers of government debt. One allows them to swap a range of illiquid assets for Treasury securities. The other facility provides cash to these broker-dealers in a system that is similar to its discount window for banks.
Bernanke said Congress might give the Fed broad power to promote financial market stability.
If Congress makes this choice, "I do not think the Fed could fully meet these objectives without the authority to directly examine banks and other financial institutions that are subject to prudential regulation," Bernanke said.
Bernanke spoke at a conference on lending to low- and middle-income borrowers, sponsored by the Federal Deposit Insurance Corp. He didn't discuss the economic outlook in his remarks.
Turf battle
Increased power for one agency typically comes at the expense of other agencies that have their own strong alliances with powerful members of Congress.
Although Treasury Secretary Henry Paulson has said that he would like to see Congress give the Fed more power to ease the fallout of financial market turmoil on the economy, it is another matter for an agency to be seen as seeking power for itself.
As a result, Bernanke bent over backwards to suggest, rather than demand, that the Fed get the broad new regulatory responsibilities he seeks, though his desire for the new powers was apparent.
"This is the first time I ever recall the Fed coming out and arguing that it needs to have expanded oversight and responsibilities," said former Fed official Robert Eisenbeis in comments to Bloomberg television.
"The Fed is seeking broad oversight responsibilities that have been rejected in the past," Eisenbeis said.
It is a wide-open question what Congress will ultimately decide to do about the glaring inadequacies of the regulatory system that have come to light in the financial market crisis that began last summer.
Lobbyists for the financial market industries have made careers provoking, easing and maneuvering around battles over regulatory turf.
Under previous chief Alan Greenspan, the Fed was an aggressive agency in terms of regulatory authority, perfectly willing to use sharp elbows against other regulators. As a result, some ill feelings linger.
The Fed would like greater authority to get detailed information about money markets and the activities of borrowers and lenders in those markets, Bernanke said.
The surprising freeze-up of money markets last August was one of the first signs of trouble for financial markets.
Bernanke said that "a strong case" could be made for granting the Fed explicit oversight authority over systemically important payment and settlement systems. 
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