Federal Reserve Board Chairman Ben Bernanke attempted to reassure lawmakers Tuesday that U.S. banks were taking steps to limit their exposure to Europe's debt problems, but acknowledged any crisis overseas would have a significant impact here.

Bernanke, testifying before the Senate Budget Committee on the outlook of the U.S. economy, said domestic banks under the central bank's purview have been providing information to the Fed to help analyze their exposures.

The Fed chairman didn't quantify the exact exposure of such firms when asked by Sen. John Thune, R-S.D., but said financial institutions were taking steps to minimize their vulnerability to countries like Greece, Ireland, and Portugal.

"Banks have made progress in protecting themselves against problems in European sovereign or bank debt," Bernanke said. "The banks still are exposed, of course, to the European counterparts, but they've also reduced that exposure and hedged it to some extent."

The central banker's appearance on Capitol Hill, the second in less than a week, comes at a critical time as Greece works to strike an agreement to make necessary cutbacks in order to win a new bailout deal and avoid defaulting on its debt next month.

Close to 58% of all U.S. banks tightened standards to European firms and their subsidiaries in the fourth quarter, according to the Fed's latest Senior Loan Officer Opinion Survey. U.S. banks have also seen an uptick in demand as European banks pulled back to rebalance their balance sheets.

During the hearing, Bernanke said the Fed has been focused on the quality of the hedges that domestic banks are making to protect themselves from fallout in Europe. "A credit default swap is no better than the bank or the counter-party who wrote it," he said.

But Bernanke emphasized that not all risk can be completely curtailed.

"It's of course difficult to ask banks to completely eliminate their exposure to a major part of the world economy which is Europe," said Bernanke. "But yet there has been progress made both by banks and by money market mutual funds in reducing exposures and improving hedging."

Even despite efforts by banks and the Fed's close monitoring of the situation, Bernanke warned that a crisis in Europe would have a significant impact on the U.S.

"If there is a very substantial crisis or some other problem in Europe — there are so many channels in which that would flow through the financial system I think our banks would still be and our whole financial would still be significantly affected," Bernanke said. "The risk aversion, the volatility, the uncertainty, all of those things, would have a powerful impact on our financial system."

In the past, Bernanke has sought to characterize U.S.' banks exposure to such debt-ridden countries in Europe as "quite minimal," but has always stressed the impact of volatility and uncertainty in financial markets.

"It isn't so much the direct exposure that concerns me," said Bernanke testifying before the Joint Economic Committee on Oct. 4. "Rather as we have seen in the last few days — it's been very evident — market uncertainty about the resolution of the Greek situation, about the broader resolution of sovereign debt issues and European banking issues has created an enormous amount of uncertainty and volatility in financial markets. It's through that volatility and indirect effects that we're being affected now."

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.