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updated 2/25/2009 1:58:18 PM ET 2009-02-25T18:58:18

Federal Reserve Chairman Ben Bernanke on Wednesday again spurned speculation that the government may nationalize Citigroup or other big banks.

When asked about Citigroup during a House Financial Services Committee hearing, Bernanke said nationalization "is when the government seizes the bank and zeros out its shareholders ... we don't plan anything like that."

But Bernanke told lawmakers it is possible the government could end up with a much bigger ownership stake in Citigroup Inc. or other banks.

In the case of Citigroup, Bernanke said: "We'll see how their test works out and what evolves."

The Fed chief was referring to new "stress tests" that regulators will start conducting on the biggest banks to judge whether they can hold up if the recession were to worsen.

The tests will help regulators decide whether the banks have sufficient capital — and the right mix of it — to withstand any additional shocks to the economy over the next two years.

The results will help regulators decide whether banks may need additional assistance so they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.

Bernanke told the House panel that if the stress test reveals that a bank needs more capital, it will have up to six months to raise the money from private companies. If it can't, then the government would provide assistance.

One option for help, laid out by the Obama administration Monday, would allow the government to sharply increase its stake in banks. That would be done by converting the government's stock in banks from preferred to common shares.

Video: Bernanke: Recession may end in 2009

The strategy, which could be applied retroactively to banks that received money in the first incarnation of the bailout, would give the government voting shares and more say in a bank's operations.

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Some banks — after they complete their stress tests — won't need additional help, Bernanke said.

Citigroup has been involved in talks with regulators over ways the government could help strengthen the bank, including use of the stock conversion plan. New York-based Citigroup already has received $45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.

On the housing front, Bernanke said the glut of unsold homes currently on the market could drive down prices far too much. The problems "could put us in real danger of driving housing well below fundamentals," he said.

The National Association of Realtors said Wednesday that sales of existing homes fell 5.3 percent to an annual rate of 4.49 million last month, from 4.74 million in December. It was the weakest showing since July 1997.

The median sales price in January plunged to $170,300, down 14.8 percent from $199,800 a year earlier and from $175,000 in December. That was the lowest price since March 2003 and the second-largest drop on record.

The number of unsold homes on the market fell almost 3 percent last month to 3.6 million. But due to the slumping sales pace, it would still take 9.6 months to rid the market of all of those properties, up from 9.4 months in December.

More on the  the economy   |  banks

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