Paulson, Bernanke Ask To Modernize Regulatory System

Washington, D.C. (AHN) - The U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged Congress to overhaul the financial markets' regulatory structure.

The top officials asked to implement the new plan that would give federal regulators the authority to set standards for the capital, liquidity and risk management of investment banks.

"When we released the blueprint, I said we were laying out a long-term vision that would not be implemented soon," Paulson said to the House Financial Services Committee on Thursday.

"Since then, the Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market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 said.

The Fed recently has funneled in as much as $29 billion to help the J.P.Morgan Chase & Co.'s takeover bid offer for Bear Stearns' assets.

During the takeover, Paulson had said that the step was to maintain market stability and that the Fed could lend some capital as a last resort in such deals.

He added that the broadest overhaul of U.S. financial regulation can be a step towards restoring confidence in the markets after the subprime mortgage crisis battered the country's as well as the economies around the world.

The changes in the regulation of the financial markets will provide the Federal Reserve new regulatory powers on the Wall Street and to create new bodies to monitor mortgages and other transactions.

According to the top officials, the overhauling and transformation will prove more important since the current regulatory systems were implemented since the Great Depression or the Civil War phase.

"Legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers," Bernanke said.

The new plan would be used for the current financial system, which is complex and cannot be fixed easily, to formulate three agencies but the significant power will remain with the Federal Reserve to investigate different market instruments including hedge funds.

Both of them also defended Fannie Mae and Freddie Mac by stating that they are "adequately capitalized."

"They play an important role in our housing markets today and need to continue to play an important role in the future," Paulson said.

Shares of Fannie Mae tumbled by 23 percent and Freddie Mac plunged by as much as 33 percent in New York Stock Exchange composite trading on Thursday.

Shares of firms continued their downturn rally for the third time on Thursday as reports indicated that the companies are on the watch-list of the U.S. Treasury Department for months.