HIGHLIGHTS-Bernanke's Q&A testimony to Senate Banking panel

Tue Jul 17, 2012 10:02pm IST

WASHINGTON, July 17 (Reuters) - Below are highlights from the question and answer session of a Senate Banking Committee hearing with Federal Reserve Chairman Ben Bernanke testifying on monetary policy and the U.S. economy.

BERNANKE ON WHETHER LIBOR MANIPULATION WAS CRIMINAL:

"Based on what I know about it, what I've read about it, it does seem to be so, yes."

BERNANKE ON EUROPEAN POLICYMAKERS' EFFORTS TO END DEBT CRISIS:

"We appear to be in a muddling-through type of environment, which is costly to everybody - Europe even more so than us. They're already in a recession, at least many countries in Europe are already in recession. I think based on all I can observe, it seems that (resolving the debt crisis) could take a very long time because the structural and institutional changes that Europe is trying to make are not ones to take place quickly."

BERNANKE ON BAD BANKING PRACTICES:

There have been many bad practices, I agree. Many of them are tied to the crisis period, the period of excess. I think that it's bad business. I think it's important for us to address those issues through enforcement. ... It's very short-sighted. It's not the way you build a long-term relationship with customers and not the way you have long-term products.

BERNANKE ON OPEN TO FURTHER TALKS ON BASEL CAPITAL STANDARDS:

"It's been our approach to have capital requirements that are broadly consistent with the international standards. ... But we're always open to further discussions, and we'll see how effects of the higher capital work through the credit system as we go forward."

BERNANKE ON REFORMING LIBOR SYSTEM:

"It will have to be an international effort because Libor is constructed by a UK organization and constructed for about 10 different currencies as well, so it has to be an international effort.

"There are broadly two approaches to fix Libor to make changes to it: to increase the visibility to reduce the ability of individual banks or traders to affect the overall Libor and to increase monitoring of the reporting process.

"The other strategy, which many people are thinking about, is going from what is essentially a reported rate to an observable market rate as the index. There are a number of possible candidates that have been advanced that might ultimately replace Libor.

"Libor is very deeply ingrained in many contracts so that change will not be a simple one to make."

BERNANKE ON RECENT INFLATION, DOLLAR MOVES:

"What we're trying to do as our mandate suggests is to strengthen the economy, which in turn should make America a more attractive place to invest and provide higher returns for everyone investing in the United States."

"We have not seen inflation yet though and the dollar has been in fact recently a good bit stronger. And we are comfortable we have the tools to unwind these policies in a way that will not threaten inflation."

BERNANKE ON RISKS OF INFLATION AND DEFLATION:

"I think inflation risk is relatively low now. Not everyone agrees with that, but my personal opinion is that that risk is reasonably low right now. And indeed, as I mentioned, there is a modest risk - not a large risk but a modest risk - of going in the other direction, which is towards the deflationary side."

BERNANKE ON WHAT THE FOMC WILL BE LOOKING AT:

"It's very important that we see sustained progress in the labor market and avoid deflation risk and those are the things we'll be looking at as the committee meets later this month and later this summer."

BERNANKE ON OPTIONS THE FED HAS TO HELP ECONOMY:

"There are a range of possibilities and I don't want to, you know, give any signal that we're choosing one among the others. But the logical range includes different type of purchase programs that could include Treasuries or could include Treasuries and mortgage-backed securities. Those are the two things we are allowed to buy.

"We could also use our discount window for lending purposes, but, you know, that's another possibility.

"We could use communication to talk about our future plans regarding rates or our balance sheet.

"And, a possibility that we have discussed in the past is cutting the interest rate we pay on excess reserves.

"That's the range of things that we could do. Each one of them has costs and benefits and that's an important part of the calculation."

BERNANKE ON WHEN TO USE UNCONVENTIONAL MONETARY POLICY TOOLS:

"They shouldn't be used lightly. Nevertheless, my own view is that these tools and other nonstandard tools still do have some capacity to support the economy. And what we'll be looking at in thinking about this is, I think, really two things. The first is, as mentioned in our statement, whether or not there is in fact a sustained recovery going on in the labor market or are we stuck in the mud so to speak, in terms of employment. That's of course our maximum employment mandate. And then the other issue would be price stability and notably .... deflation risks."

BERNANKE ON EFFECTIVENESS OF QUANTITATIVE EASING:

"Economists differ on how effective the tools have been. My own assessment is that the quantitative easing and Operation Twist so-called tools have been effective in easing financial conditions and in promoting strength in the economy.

"QE2 was certainly effective at addressing what was beginning to become a worrisome amount of deflation in the fall of 2010. My views, and the view of our analysts at the Fed, is that it also contributed to economic growth. It is hard to judge because it depends on what you think would have happened in the absence of those actions."

BERNANKE ON NEED FOR MORE LIBOR REFORMS; LIMITS OF FED:

"The British Bankers Association did not adopt most of the suggestions that were made by the Federal Reserve Bank of New York. They made a relatively small number of changes. It's likely that the concerns are less now because we're no longer in the crisis period. ... I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts."

BERNANKE ON FLAWS IN LIBOR SYSTEM FLAWED:

"It's clear that beyond these disclosures, that the Libor system is structurally flawed and part of the response was to address those flaws."

"There was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received."

BERNANKE ON EXEMPTING SMALL DERIVATIVES END-USERS FROM NEW RULES:

"We believe that the statute does require us to impose some type of margin requirement. We tried to mitigate the effect as much as possible by allowing for exemptions when the credit risk associated with the margin was viewed as being sufficiently small. So, many small end-users would be exempt in practice."

BERNANKE ON LIBOR AND PUBLIC CONFIDENCE:

"The actions of traders and banks that have been disclosed are not only very troubling in themselves, but they have the effect of undermining public confidence in financial markets."

BERNANKE ON REPORTING ITS FINDINGS OF FLAWS IN LIBOR SYSTEM:

"On May 1st then-President (of the Federal Reserve Bank of New York Timothy) Geithner briefed the president's working group, which consisted of the Treasury, the Fed, the CFTC and the SEC among other participants."

"There was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received."