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Lift "cloud of default" from economy: Geithner

By Glenn Somerville and David Lawder

WASHINGTON (Reuters) - It is essential Congress lift the United States' $14.3 trillion debt ceiling to ward off a historic default and preserve financial stability, Treasury Secretary Timothy Geithner said on Tuesday.

As he released the first annual report of the Financial Stability Oversight Council, a group of regulators charged with guarding against a repeat of the 2007-2009 financial crisis, Geithner made plain what he considered the No. 1 priority.

"The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy," he said in a statement as a political impasse over raising the debt limit dragged on.

The oversight council is mandated to identify and head off excessive risk-taking by U.S. financial institutions and spot risks that have the potential to trigger a disastrous crisis.

The report said the European debt crisis, specifically the sovereign credit risk of Greece, Ireland and Portugal, posed one such risk. U.S. banks have limited direct exposure to the three debt-laden European nations, but have important ties to big banks elsewhere in Europe that do.

"The impact on the U.S. financial system of events in Europe depends on how the peripheral European sovereign debt crisis evolves and on the resilience of U.S. financial institutions and markets," the report said.

It said U.S. regulators were carefully monitoring potential risks that could arise from Europe's debt woes.

Geithner chairs the FSOC, whose membership includes Federal Reserve Chairman Ben Bernanke and heads of other key regulatory agencies, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, who meet periodically to assess conditions in financial markets.

An important part of the council's function is to make recommendations to bolster U.S. financial institutions' ability to withstand stress, and the report contained a number of them, although few specifics were provided.

It recommended setting up national mortgage servicing standards and finding alternatives to flat-fee payments for servicers -- a bid to encourage banks to negotiate more readily with financially stressed mortgage holders.

The report said the council also will examine how to strengthen money-market mutual funds, possibly by establishing mandatory floating net asset values for them. Their net asset values are currently fixed at $1 per fund share.

One of the oversight council's most significant powers is its ability to declare certain banks or other financial institutions as "systemically important," meaning that a failure by them might topple the system into crisis.

Banks or other firms that are put in this category become subject to increased supervision.

A senior Treasury official, briefing reporters on the FSOC report, refused to say when the council will release more guidance on how it will decide which firms may be designated as systemically important.

Regulators had hoped to release a package of proposed rules this summer, and the new standards are required by the Dodd-Frank law to be in place by January 2012.

But the official said it was "more important to get it done right than get it done quickly" in setting out its standards for how systemically important firms will be selected.

(Reporting by Glenn Somerville and David Lawder; Editing by Leslie Adler)

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