WASHINGTON — Federal Reserve Board Chairman Ben Bernanke on Tuesday delivered his strongest rejection yet of growing expectations on Wall Street that the government might seize control of a large bank.
"We don't need majority ownership to work with the banks," the Fed chief told Congress. "We have very strong supervisory oversight. We can work with them now to get them to do whatever is necessary to restructure and take whatever steps are needed to become profitable again."
Mr. Bernanke also used his appearance before the Senate Banking Committee to offer more details on stress tests the Treasury Department plans to begin Wednesday and thoughts on reforming holding company regulation.
Some lawmakers were not convinced that government bank takeovers are off the table.
Sen. Bob Corker, R-Tenn., said a plan to let the government's preferred shares in financial institutions be converted into common stock amounts to "creeping nationalization."
Mr. Bernanke countered by describing the plan as a "public-private partnership."
His testimony was backed up by Sen. Chris Dodd, the panel's chairman, whose own comments last week stoked nationalization fears.
"The absolute best situation is these institutions in private hands," the Connecticut Democrat told reporters. "We don't create markets in the federal government."
The new stress tests are intended to give policymakers a better understanding of where banks would stand in worst-case scenarios. But Mr. Bernanke indicated the tests might have more bark than bite.
If an evaluation demonstrates that an institution lacks enough capital and needs support from the government, Mr. Bernanke said, regulators would not employ "prompt-corrective-action" tools, which work on a sliding scale from minor to severe sanctions such as replacing management.
Sen. Corker questioned the message that sends.
"The signal to the markets — and I'm just clarifying — is that there are institutions in this country that absolutely will not fail and we will go to whatever lengths necessary with public-sector dollars to make sure" they do not, he said.
Mr. Bernanke essentially agreed that the largest institutions are too big to fail.
"We are committed to ensuring the viability of all the major financial institutions," he said.
The central bank chief made it clear that financial regulation needs fundamental reform.
One improvement: Give the Fed more power to assess subsidiaries of the bank holding companies it already oversees.
"Consolidated supervision of large, complicated institutions is very important, even more important than we thought it was before," he said, "because of the potential for a consumer finance company there or a broker-dealer there to provide a greater risk for the whole organization."
Mr. Bernanke went on: "If anything, what we need to do is be more aggressive in looking not only at the holding company level but looking down into the underlying companies beneath the holding company to make sure that they are observing consumer protections and the like."
The list of holding companies the Fed oversees has grown in recent months as Morgan Stanley, Goldman Sachs, and GMAC, among other companies, have converted their charters.
It is unclear how other regulators, such as the Office of the Comptroller of the Currency, might react to a bigger role for the Fed, but Mr. Bernanke said the central bank would be mindful of the other agencies.
"There was some tendency, I think, to defer entirely to the functional regulators who were responsible for the companies underneath the holding company," he said. "Indeed, we want to respect those priorities in the way that Congress set up the rules, but the holding company supervisor does have the responsibility to make sure that the policies are not just being set by the top management but, down in the various organizations below that, that policy is being followed."
Mr. Bernanke fought the growing perception that banks have been able to tap billions of taxpayer dollars without being forced to lend or feeling any kind of pressure from regulators.
"That's absolutely not the case," he said. "The regulators are now very actively engaged, particularly in the more troubled institutions, working with them to restructure, to sell assets, to take whatever steps they need to take to get viable again, to prosper again. We're not going to let them do what they want."
The Fed chairman also highlighted a cornerstone of his tenure at the Fed — transparency. He said the central bank's weekly balance sheet includes more information than ever and touted a new Web site designed to supply more information to the public.