July 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke called for ``additional tools'' for the Fed to maintain financial stability as lawmakers consider overhauling regulators in the aftermath of the credit crisis.

Congress should give a single federal regulator enhanced power to set standards for the capital, liquidity and risk management of investment banks, Bernanke said today in testimony to the House Financial Services Committee. He also asked for a procedure to liquidate failing investment banks and for Fed powers over payments systems.

A ``consensus'' is emerging that the Fed should take on more authority, said Representative Barney Frank, who chairs the panel. That indicates a diminishing role for the Securities and Exchange Commission, the agency that has had responsibility for investment banks.

Bernanke agreed with Frank, a Massachusetts Democrat, that it's more important to get the regulatory changes right than rush to enact them. Frank said Congress may take up legislation next year. Treasury Secretary Henry Paulson reiterated to the committee his proposal for the Fed's responsibilities to broaden, taking on the role of market-stability regulator.

Paulson said the ``primary focus'' for officials for now is ``confronting current challenges and maintaining stable, orderly financial markets.''

Fannie Mae, Freddie Mac

The Treasury chief highlighted assurances that Fannie Mae and Freddie Mac, the biggest sources of U.S. housing finance whose shares have plunged this week, have enough capital. Bernanke urged that they raise more money.

``Their regulator has made clear that they are adequately capitalized,'' Paulson said, referring to the Office of Federal Housing Enterprise Oversight. Frank hailed Paulson's remarks as an ``important statement.''

Freddie Mac has slumped 41 percent in the past week and Fannie Mae has lost 22 percent on concern the firms don't have enough capital to offset writedowns. The declines are the latest episode in a credit crisis that has caused more than $400 billion of writedowns and credit losses.

``I believe they are well capitalized in a regulatory sense,'' Bernanke said. At the same time, he said he included the firms in his ``call for more capital'' from financial firms more widely.

Paulson declined to comment on whether the so-called government sponsored enterprises posed a ``systemic'' risk to the financial markets.

Private Equity

Bernanke also said the Fed is looking at ways to make it easier for private equity companies to invest in banks, as lenders seek to raise capital to repair their balance sheets. Private pools of capital are limited in how much of a bank's shares they can buy, and how they can structure their investments, under bank regulatory rules.

``Private equities are a very good source of capital,'' Bernanke said in answering questions at the hearing. ``We are currently looking'' at rules governing investments in banks ``in the hope that we will make a clear statement about when private equity can come in and add capital.''

Banks and financial companies have raised more than $320 billion of capital since the start of last year. Bernanke said ``we are looking for banks and other financial institutions to raise capital.''

The Standard and Poor's Financials Index, which includes 89 banks, brokers and insurance companies, has tumbled 46 percent over the past 12 months.

Failed Approach

At the same time as addressing the crisis, officials and lawmakers should consider longer-term changes to the regulatory system, Paulson and Bernanke agreed. The Fed chief two days ago acknowledged that the two main pillars of the U.S. approach toward the financial system -- market discipline and regulation -- both failed to prevent the turmoil.

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

Bernanke didn't specify which federal agency should become the ``consolidated'' supervisor. Frank said it should be the Fed.

``The Federal Reserve needs more power,'' said Frank, a Massachusetts Democrat. ``There is a great deal of agreement that we should be empowering the Federal Reserve to have regulatory authority over a wide range of financial institutions.''

Overregulation Risk

Bernanke at the same time warned against overregulation that could hurt markets.

``Reforms in the oversight of these firms must recognize the distinctive features of investment banking,'' and supervisors must take care not ``to induce a migration of risk- taking activities to less-regulated or off-shore institutions,'' he said.

Bernanke and Paulson have both called for a liquidation procedure to provide for an orderly closure of an investment bank that fails. The effort aims to prevent the type of emergency Fed loan needed to rescue Bear Stearns Cos. in March.

Congress should consider rules and mechanisms for liquidating ``a systematically important securities firm that is on the verge of bankruptcy,'' Bernanke said.

The Fed chairman didn't refer to the economy or interest rates, topics he'll discuss during his semi-annual testimony before the House and Senate next week. His prepared remarks repeated comments earlier this week in a speech to a Federal Deposit Insurance Corp. conference.

`Ongoing' Turmoil

``The financial turmoil is ongoing,'' Bernanke said. ``Our efforts today are concentrated on helping the financial system return to more normal functioning.''

Fed and SEC officials this week announced an agreement to give the central bank more information on investment banks' capital and liquidity. Frank said he applauded the memorandum of understanding.

``The evidence is now clear that we are in one of the most serious economic troubles that we have seen recently because in part of an inadequacy of regulation,'' Frank said. There's a consensus among regulators and lawmakers that ``an increase of regulation is required.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: July 10, 2008 12:14 EDT