Bernanke says credit markets strained but capital helping

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday that credit markets, while stabilizing, remain under serious strain and government capital injections into banks are needed to help restore normal lending.

"There are some signs that credit markets, while still quite strained, are improving," he said in testimony prepared for delivery to the House of Representatives Financial Services Committee.

Bernanke appeared on a panel with Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp Chairman Sheila Bair to discuss government efforts to help the U.S. economy, which has been slammed by the collapse of housing markets and a credit crisis.

Lawmakers urged authorities to use funds from the $700 billion (468 billion pounds) Troubled Assets Relief Program to assist homeowners facing foreclosure, an idea proposed by Bair but rejected by Paulson who has said the bailout package should be used for investments, not spending.

Without directly endorsing the FDIC plan, Bernanke agreed with lawmakers at the hearing that the government could play a more active role in preventing foreclosures.

"I think a very strong point of the FDIC program is it's simple and it's run by the servicers rather than the government," he said in response to questions.

"In general ... this is a very promising approach," he said.

The Fed has offered financial institutions hundreds of billions of dollars worth of loans in an effort to prevent the financial system from collapsing as institutions shrink from taking risks in the wake of a surge of mortgage delinquencies.