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 four-year term, Bernanke admitted to some lapses in oversight, but said being involved in 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.

The soft-spoken Fed chairman, who is widely expected to win Senate backing for a second term, also argued the central bank's aggressive actions to combat the financial crisis 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.

President Barack Obama in August nominated the former Princeton University economics professor, whose current term expires on January 31, 2010, to another four-year stint, praising his crisis-fighting efforts.

The crisis, which erupted on Bernanke's watch, provided fertile ground for tough questioning from both Democrats and Republicans on the committee, which needs to approve the nomination before it can be considered by the full Senate.

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.

Republican Senator Jim Bunning of Kentucky, a long-time Fed critic and the only panel member to oppose Bernanke four years ago, went further, saying he would do everything possible to block and stall his reappointment.

From monetary policy to regulation, consumer protection, transparency and independence, your time as Fed chairman has been a failure, Bunning said.

Despite the aggressive questioning, several senators praised Bernanke's tactics in battling the financial crisis, the worst in generations, and the Fed chief answered the critiques calmly.

Under his tenure, the Fed has slashed interest rates to near zero and pumped more than $1 trillion into the financial system. Still, the economy has suffered its deepest recession since the Great Depression and the unemployment rate now hovers at a 26-1/2-year high of 10.2 percent.

(For a graphic on milestones in the Fed's crisis-fighting efforts, double-click on: http://link.reuters.com/muz74g)

ANGRY AT BAILOUTS

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

Senator Bernie Sanders, an independent from Vermont who is not a member of the banking committee, has said he would place a hold on Bernanke's nomination. That move could force Senate leaders to round up 60 votes just to consider the nomination, which would likely slow the confirmation process.

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 the right signal to financial markets.

Speaking to reporters on the sidelines, the Connecticut Democrat said he believed Sanders' effort to block the nomination would not succeed.

I think the majority of the members will support the chairman, Dodd said.

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 one 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. Bernanke defended the Fed's current governance structure in his testimony.

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.

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.

Barack obama Timothy geithner Ben Bernanke