The US government’s unprecedented “stress tests” of the 19 largest US banks should bolster Americans’ battered confidence in US banking system, Federal Reserve Chairman Ben Bernanke said on Monday as he defended the rigor of the exams.
The much-anticipated results, released last Thursday, showed that 10 banks — including Bank of America Corp, Wells Fargo & Co and Citigroup Inc — must raise a total of US$75 billion in new capital to absorb potential losses if the recession were to take a turn for the worst.
The remaining nine — JPMorgan Chase & Co and brokerage house Goldman Sachs Group Inc among them — had enough capital to withstand a deeper recession.
“We hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion,” Bernanke told a Fed conference on financial markets held at Jekyll Island, Georgia.
Four of the banks judged sound enough to survive a deeper recession — US Bancorp, Capital One Financial Corp, BB&T Corp and Bank of New York Mellon Corp — announced on Monday that they planned to issue stock to help repay money the government doled out last year.
Bernanke said it would take time to evaluate whether the stress-test process helps to reduce the uncertainty that has hung over investors and the economy about banks’ future losses and capital needs.
“However, the initial indications are encouraging,” he said.
Each of the 10 banks requiring an extra capital buffer against potential losses has pledged to have this additional cushion in place by a Nov. 9 deadline, Bernanke said.
Many banks are already “well ahead” in finding private-sector options for increasing their capital base by selling shares and several have announced plans for new stock issues, he said. And, several banks have announced plans to issue long-term debt not guaranteed by the Federal Deposit Insurance Corp, another positive sign, Bernanke said.
“We hope that in two or three years we will be able to reflect on the banking system’s return to health with a sharply diminished reliance on government capital,” Bernanke said.
Fielding questions after his speech, Bernanke said he believed the dollar would regain value.
“The dollar will be strong,” he said, because the Fed is committed to ensuring that prices are stable.
One of the reasons why the Fed has been so aggressive in terms of slashing interest rates to a record low near zero and turning to unconventional ways to lift the country out of recession is because “we are trying to avoid another form of price instability, which is deflation,” he said.
Deflation refers to a widespread and prolonged decline in retail prices, wages and asset values, such as stocks and homes.
The risk of deflation is “receding but it certainly needs not to be ignored,” Bernanke said.
Bernanke also said big, globally interconnected financial firms whose failure could endanger the US economy should be subject to “additional supervision” to make sure they are “restrained from taking too much risk.”
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