The nationalization of banks is counterproductive to the health of the banking system and the overall economy, according to Fed Chairman Ben Bernanke.

In testimony to the House Financial Services Committee on Wednesday, Bernanke echoed comments made in testimony before the U.S. Senate Tuesday: that full nationalization means eliminating all common shares for a firm, and such action would be disruptive to financial markets.

The government does not need to be involved in the basis of day-to-day operation of financial institutions but should be part of larger decision making processes, he said. Bernanke was specifically referring to dividend restrictions on financial institutions accepting bailout cash from the government.

He also noted that many small banks in the U.S. are well-capitalized, and have the resources to play a constructive role in resolving the crisis.

Bernanke repeated previous hints of an upcoming program from the U.S. Treasury. The plan would allow the government to sell preferred shares of firms in exchange for common equity, but he declined to reveal further comments on how the Geithner plan will look, saying only that he believed the propositions would help stabilize the U.S. financial system.

He also clarified that the soon-to-be-announced Fed Term Securities Lending Facility may be useful to purchase "refinanced" securities, and said the AAA requirement on the securities purchased by the Fed would not impair its ability to impact hard-hit markets such as the auto sector.

The Fed and Treasury Department have closely examined the risk to the Term Securities Lending Facility and determined that the potential losses are minimal, he added.

He also said the SEC is looking at the possibility of restoring the uptick rule for shorting stocks, which might have been helpful in limiting the damages of the financial crisis.

Nevertheless, Congress will have the task of making sure people can be confident that such a situation will not again occur, he added, citing the possibility of more Fed powers and reforming the financial and regulatory systems.

He also said more funding from government may be needed.

By Erik Kevin Franco and edited by Megan Ainscow
©CEP News Ltd. 2009