Federal Reserve Chairman Ben Bernanke on Thursday defended his record at the helm of the U.S. central bank before a skeptical Senate that is considering stripping the institution of its regulatory powers.

At a hearing on his nomination for a second term as Fed chief, Bernanke admitted to some lapses in oversight but said maintaining hands-on expertise on bank supervision was crucial to the Fed's role as a custodian of financial stability.

In order to be a lender of last resort, to know how to respond to an ongoing crisis or threat of crisis we need to have the expertise, information and authority associated with a bank supervisor, Bernanke told the Senate Banking Committee.

President Barack Obama nominated the former Princeton University economics professor to another four-year stint as Fed chair in August, praising his handling of the worst financial crisis since the 1930s.

His current term expires on January 31 and, while his confirmation is widely expected, the global financial crises provided members of the committee with fertile ground for tough questioning.

The panel's top Republican, Senator Richard Shelby of Alabama, wondered why the Fed spent so little time discussing regulation at its periodic policy meetings.

Would it be fair to say that before the crisis in the last couple of years not a lot of time was spent on regulatory supervision? asked Shelby.

Despite the aggressive tone of some questions, a number of senators praised Bernanke's tactics for addressing the financial crisis once it had arrived, and the chairman answered the critiques calmly.

Under his tenure, the Fed has slashed interest rates close to zero and pumped more than $1 trillion dollars into the financial system to beat back the worst financial crisis since the Great Depression.

Despite these efforts, the U.S. economy suffered its deepest recession since the 1930s. The unemployment rate now hovers at a 26-1/2 year high of 10.2 percent.

The soft-spoken Fed chairman, who was first named to the post by President George W. Bush, said the Fed's aggressive actions were crucial to preventing an even worse economic outcome.

As serious as the effects of the crisis have been ... the outcome could have been markedly worse, Bernanke said. We played a central role in efforts to quell financial turmoil.

ANGRY AT BAILOUTS

Pressured by angry constituents, lawmakers are upset over taxpayer bailouts of financial firms such as American International Group and Bear Stearns and what they see as lax Fed regulation of banks and lenders that laid the groundwork for the credit crisis.

Senator Bernie Sanders, an independent from Vermont who is not a member of the panel, said on Wednesday he was placing a hold on the nomination, arguing the Fed chief had done little for average Americans, while going too easy on big banks.

That move could force Senate leaders to round up 60 votes just to consider the nomination, which could slow the confirmation process and give critics an opportunity to press their case.

The Wall Street Journal, in an editorial on Thursday, said Bernanke does not deserve a second term, expressing concern he might not be up for the tough challenge of raising interest rates during a weak recovery.

The hard part, the time when central bankers earn their fame, is when they have to take the money away, it said.

Despite voices of discontent, the nomination appears set to overcome any hurdles.

Committee Chairman Christopher Dodd opened the hearing by making clear he would support the nomination, saying the reappointment would send right signal to financial markets.

Earlier on Thursday, Treasury Secretary Timothy Geithner rose to Bernanke's defense. He did things that had never been done in the past with enormous creativity and bravery, frankly, he told CNBC. The president has full confidence in him and we are confident he will be confirmed.

FED INDEPENDENCE

Dodd's panel needs to approve the nomination to send it before the full Senate. If the Senate does not confirm him by January 31, Bernanke could continue to serve unless replaced.

Even if the confirmation does sail through, Bernanke faces the prospect of running a diminished institution if some of the congressional proposals to curtail the Fed's powers and political independence become law.

Dodd has proposed stripping the Fed of its regulatory powers in favor of unifying fragmented U.S. bank oversight under a single roof. He would also require presidential appointment and Senate confirmation of regional Federal Reserve bank board chairmen, taking away a prerogative currently enjoyed by the 12 regional Fed banks.

More worrying to Fed officials, legislation the House of Representatives could vote on next week would submit the central bank's monetary policy decision-making to review by a congressional watchdog agency. Sanders has backed a matching measure in the Senate, but Dodd voiced support for the Fed's independence at the hearing.

Bernanke, who has warned the measure could spook investors and drive up interest rates, sought to erect a roadblock to the measure in the Senate with his testimony.

The Fed's credibility depends on the market's perception that we are independent in making monetary policy decisions, he said.

(Additional reporting by Glenn Somerville in Washington and Steven C. Johnson in New York; Editing by Chizu Nomiyama)

George W. Bush Barack obama Timothy geithner Ben Bernanke