- Associated Press - Thursday, May 12, 2011

Federal Reserve Chairman Ben S. Bernanke and other regulators gave Congress an update Thursday on their efforts to implement the biggest overhaul of the nation’s financial rules since the Great Depression.

In testimony to the Senate Banking, Housing and Urban Affairs Committee, Mr. Bernanke said the Fed will announce regulations this summer designed to protect the U.S. economy from another meltdown of the nation’s largest banks and financial companies.

Congress directed the Fed to write the rules when it enacted the financial regulatory overhaul last year. The law aims to prevent a financial crisis like the one in 2008 that plunged the economy deeper into recession.

The rules will require big banks and others, such as Wall Street firms, hedge funds and insurance companies, whose failures could endanger the economy, to be subject to more strict requirements for the amount of capital and cash they must have on hand to cushion against potential losses in case of a financial crisis.

“Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms, and that minimizes the losses to the financial system and the economy if such a firm should fail,” Mr. Bernanke said in the testimony.

The Fed will allow the public, banks and other interested parties to comment on the proposed regulations before implementing them in January.

Mr. Bernanke also acknowledged that some small banks could be hurt if regulators allow them to charge more than big banks for processing debt card transactions.

The higher fees, paid by retailers each time Americans swipe their cards, could make debit cards issued by smaller banks less attractive to merchants.

“There’s good reason to be concerned about it,” Mr. Bernanke said. It could result in some smaller banks “being less profitable or even failing,” he said.

Current fees typically range between 1 percent and 2 percent of each purchase, averaging 44 cents. The Fed has proposed capping that at 12 cents, though smaller banks could charge more. Bankers want lawmakers to delay the change in hopes that it eventually will be killed or toned down.

Separately, Mr. Bernanke and Neal Wolin, the Treasury Department’s No. 2 official, urged Congress to raise the $14.3 trillion limit on the nation’s borrowing authority.

“Using the debt limit as a bargaining chip is quite risky,” Mr. Bernanke said. Republicans in Congress want cuts in federal spending in exchange for any increase in the government’s borrowing authority.

Failing to raise the limit would cause interest rates on mortgages and other consumer loans to rise, rattle financial markets and hurt the economy, he said.

Mr. Wolin said it would be “unthinkable.”

AP writer Marcy Gordon contributed to this report.