Bernanke: Currency Flexibility in China's Best Interest

Federal Reserve Chairman Ben Bernanke on Wednesday said it would be in China's best interest to move toward a more flexible currency.

"It would be very much in their interest to increase the flexibility of their exchange rate," Bernanke said in answering questions after speaking to a group here.

The Fed chairman also said there appears to be no risk that China would cut its holdings of U.S-denominated reserves.

"There is no indication that they are thinking of radically changing their composition of assets. I don't consider this to be a significant risk at this point," he said, cautioning that China must move to a market-based system and cannot accumulate big reserves indefinitely.

"That's truly not a sustainable situation," he said.

'Light Regulation' of Hedge Funds

Light regulation of hedge funds has worked well so far and seems appropriate given the benefits they provide to the financial system, Ben Bernanke said.

In prepared remarks at the New York University Law School, Bernanke said it might be possible to apply more sophisticated risk-management techniques but the purpose of the big funds is to take risks.

"Market discipline does not prevent hedge funds from taking risks, suffering losses, or even failing -- nor should it," the fed chief said. "If hedge funds did not take risks, their social benefits -- the provision of market liquidity, improved risk-sharing, and support for financial and economic innovation, among others -- would largely disappear."

Hedge funds are investment pools that are aimed primarily at wealthy investors and institutions. Bernanke said the regulatory oversight that was applied to them was "relatively light" and acknowledged that their growing market share has raised concerns about possible systemic risk.

"The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of those positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties," Bernanke said.

"In the worst scenarios, these counterparty losses could lead to further defaults or threaten systemically important institutions," he added.