WASHINGTON — Under fire from Democrats and Republicans alike, Ben S. Bernanke defended his record Thursday as chairman of the Federal Reserve but admitted that the central bank’s own lapses contributed to the financial crisis.
“I did not anticipate a crisis of this magnitude,” Mr. Bernanke acknowledged in an occasionally contentious hearing on his nomination for a second term as Fed chairman.
Mr. Bernanke volunteered that the Fed had been “slow” in protecting consumers from high-risk mortgages during the housing bubble and that it should have forced banks to hold more capital for all the risks they were taking on.
“In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”
As he faced the Senate Banking Committee on Thursday, Mr. Bernanke still seemed to have enough support to win Senate approval for a second term.
But he and the Fed came under withering criticism from some lawmakers for failing to recognize the crisis until it was too late and then bailing out financial giants like Citigroup and the American International Group.
“In the face of rising home prices and risky mortgage underwriting, the Fed failed to act,” said Senator Richard Shelby of Alabama, the senior Republican on the banking committee. “The Fed chose not to use its rule-making authority over mortgages to arrest risky lending and underwriting practices.”
“Many of the Fed’s responses, in my view, greatly amplified the problem of moral hazard stemming from too big to fail treatment of large financial institutions and activities.”
Mr. Shelby said he had lost much of his confidence and trust in the Fed, and made it clear he had not yet decided whether he will support Mr. Bernanke for a second four-year term.
Mr. Bernanke and the Fed were already under fire from populist wings of both the Democratic and Republican parties.
On Tuesday evening, Senator Bernard Sanders of Vermont declared that he would try to block Mr. Bernanke’s approval on the Senate floor by placing a “hold” on his nomination. Senate leaders would need 60 votes, rather than a simple majority, to override the hold.
Senator Jim Bunning, a Kentucky Republican who was the only person to vote against Mr. Bernanke’s original appointment as Fed chairman in 2006, vowed to “do everything I can to stop your nomination and drag this out as long as I can.”
Mr. Bernanke did not flinch. While acknowledging that the Federal Reserve had made mistakes, he assert that the massive rescue operations put in place by the Fed, the Treasury and by Congress had prevented the financial crisis from being “markedly worse” than it was.
“Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies,” Mr. Bernanke said in his written remarks.
The Fed chairman also highlighted the central bank’s efforts to tighten financial regulation in many areas, from tougher rules against subprime mortgages and credit card fees to tougher capital requirements and new proposals to regulate executive compensation at banks.
“A financial crisis of the severity we have experienced must prompt financial institutions and regulators alike to undertake unsparing self-assessments of their past performance,” Mr. Bernanke acknowledged.
“At the Federal Reserve, we have been actively engaged in identifying and implementing improvements in our regulation and supervision of financial firms,” he said.
Mr. Bernanke appeared to have the support of most Democrats on the banking committee, including its chairman, Senator Christopher J. Dodd of Connecticut. Mr. Dodd praised Mr. Bernanke’s response to the financial crisis and forcefully endorsed him for a second term, but he argued that the power to regulate financial institutions should be turned over to a new and separate regulatory agency.
“Under your leadership, Mr. Chairman, the Federal Reserve has taken extraordinary actions to right the economy,” Mr. Dodd told Mr. Bernanke. “I believe that you deserve another term as chairman of the Federal Reserve, and I intend to vote for your nomination.”
Mr. Bernanke, a Republican, was appointed to his first term as Fed chairman by President George W. Bush. But he has forged a closing working relationship during the financial crisis with President Barack Obama, who nominated him for a second four-year term.
If critics like Mr. Sanders and Mr. Bunning follow through on their pledges to block Mr. Bernanke’s nomination, Senate leaders will need to come up with 60 votes override their “holds.”
But unlike so many of the partisan battles that have often paralyzed the Senate, because Democrats hold 60 votes, Mr. Bernanke has enough support in both parties to clear that hurdle eventually.
Mr. Bernanke’s term as Fed chairman expires on Jan. 31, 2010. But even if the Senate does not confirm him or some other candidate by that date, Mr. Bernanke would still hold his seat as a Fed governor and would be allowed to remain an acting Fed chairman until a successor was confirmed.
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