By Alyce Andres-Frantz

CHICAGO Sep 25 (MNI) - Federal Reserve Gov. Kevin Warsh Friday said the U.S. financial system remains in a period of repair and stressed that the Fed will remain diligent.

Warsh gave a luncheon address to the 12th annual International Banking Conference hosted by the Chicago Federal Reserve.

In a question and answer with the audience, Warsh said "the purpose of my remarks is not to claim victory, not to say that the response to the crisis is over, but rather that we are in a long period of repair."

The central bank "appreciates those challenges," and the Fed will continue to offer its "best judgments," on the remedy for the current situation, Warsh said.

Warsh noted that while the central banks around the globe have "very separate mandates" the Fed's most important asset is its credibility.

Warsh reminded that the credibility the Fed has built up, "is credibility we will not squander," adding that the Fed will continue to remain transparent on policy decisions.

"The Fed has been accused of a lot of things, but not a lack of boldness," Warsh told the audience.

"History will judge whether that boldness is matched by Fed actions going forward. The Fed has been unafraid to pull punches," even on views associated with the U.S. financial architecture, Warsh explained.

Warsh added that the situation unfolding in Washington is a "a once in a generation," event adding that the part of the challenges facing lawmakers is that the "financial architecture is moving."

Warsh added while financial institutions are facing a new reality and Washington lawmakers are in the midst of considering a new architecture, "the Fed will continue to call it the way we see it."

Warsh told the audience that the Fed was keenly aware that not all the numerous products created by the Fed over last 18 months were "going to be able to work perfectly."

But, he said, "If we come out of this with more products that were useful during the crisis, we are better for it."

On international swap lines, Warsh said they "seemed to have matched their intended purposes and provided dollar liquidity where necessary and provided assurance and provided market functioning. We will have to debate going forward what products become part of a permanent part of our arsenal."

When questioned about the prospects for swap lines to emerging markets, Warsh said "when extending (lines) we need to be very comfortable in out counterparty and be sure that there are swap facility from other entities."

He added that the IMF and other entities are looking at the availability for swap lines and Fed is evaluating their effectiveness as we speak."

As for the fate of Fannie Mae and Freddie Mac, Warsh said while the "Fed did not have perfect foresight on wholesale funding at investment banks, the situation at Fannie and Freddie were fully predictable."

"Spring of 2008 offered few degrees of freedom," Warsh said, which ultimately made it essential for the two entities to move into conservatorship.

"It strikes me that Congress has on its agenda the role in mortgage origination. If Congress decides that mortgage finance is fundamental for the provision of credit, it should be done on balance sheet and with government backing," yet he added this is not likely a judgement that is high on the list in current legislative timeframe.

** Market News International Chicago Bureau: 708-784-1849 **