Federal Reserve Chairman Ben Bernanke said on Friday that innovation in credit markets must not be stifled, but complexity designed to confuse customers and drive up lending fees would not be tolerated.

Bernanke also made plain that the pain from the most severe recession in a generation would linger for a while.

The damage from this turn in the credit cycle -- in terms of lost wealth, lost homes, and blemished credit histories -- is likely to be long-lasting, he said, in his only reference to the economy in his speech at a Fed conference on community finance .

In discussing the delicate line that regulators must walk, he said: The challenge faced by regulators is to strike the right balance: to strive for the highest standards of consumer protection without eliminating the beneficial effects of responsible innovation on consumer choice and access to credit.

Bernanke, who did not directly discuss the outlook for the U.S. economy or monetary policy, told the conference that some lenders had deliberately made their products confusing to mask higher fees.

In those cases, direct regulation, including the prohibition of certain practices, may be the only way to provide appropriate protections, the Fed chief said.

He cited credit cards charging a variety of interest rates that deliberately prolonged the period that customers were paying at the highest level, as well as subprime mortgage practices that willfully understated the costs of ownership.

Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes, he said.

When complexity reaches the point of reducing transparency, it impedes competition and leads consumers to make poor choices. And, in some cases, complexity simply serves to disguise practices that are unfair and deceptive.

He also took aim at the practice of repackaging loans into so-called securitized bundles that can be distributed to a broader range of investors than traditional bank lenders.

The practice of securitization, notwithstanding its benefits, appears to have been one source of the decline in underwriting standards during the recent episode, he said.

(Reporting by Alister Bull, Editing by Leslie Adler)

Ben Bernanke