Bernanke Says U.S. Banks Must Test More to Identify Other Risks

(Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said efforts by U.S. banks to raise capital are “encouraging” and called on firms to identify other risks through internal stress tests.

The banks, especially those with “trading and investment banking businesses,” should keep monitoring “operational, liquidity and reputational risks,” which weren’t addressed by the exam concluded last week, Bernanke said in a speech yesterday at a Fed conference in Jekyll Island, Georgia.

The remarks signal that the Fed and other U.S. regulators will keep a closer eye on firms such as Goldman Sachs Group Inc. and Morgan Stanley after last year’s collapse of Lehman Brothers Holdings Inc. and near-failure of Bear Stearns Cos. The Fed-led tests of the 19 largest U.S. banks showed last week that 10 firms need to raise a total of $74.6 billion in capital.

“Ideally, the stress tests used in the assessment program should be part of a broader palette of internal stress tests conducted by firms,” Bernanke said at the event hosted by the Atlanta Fed district bank. “Indeed, we do not intend that the capital assessments should be taken as all that those firms need to do.”

Losses under more adverse economic conditions may total almost $600 billion over two years, the government said May 7.

Treasuries were little changed after Bernanke’s remarks. The yield on the 10-year note fell one basis point to 3.17 percent as of 12:12 p.m. in Tokyo, according to BGCantor Market Data.

“You wouldn’t expect Bernanke to say anything else,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “Any negative attached to the stress tests has been carefully managed by people like Bernanke.”

Bailout Funds

Capital One Financial Corp., U.S. Bancorp and BB&T Corp. said they will sell shares to repay government bailout funds after the tests showed the companies can weather a worsening recession without additional aid.

Wells Fargo & Co., which the government said needed $13.7 billion in additional capital, raised $8.6 billion selling shares last week, more than planned. Goldman Sachs in April, before stress test results were released, said it would raise $5 billion to repay federal rescue funds.

“If it helps reduce uncertainty among investors regarding future losses and capital needs, and thereby improves the banking system’s access to private capital, one of the key objectives of the program will have been achieved,” Bernanke said. “Initial indications are encouraging.”

‘Well Ahead’

Banks are “well ahead” in finding ways to increase capital and several have already announced plans to raise equity or issue long-term debt not guaranteed by the Federal Deposit Insurance Corp., Bernanke said.

Bernanke didn’t discuss the economic outlook or monetary policy in his speech.

In response to an audience question about Lehman’s failure, Bernanke said the central bank had no option other than letting the investment bank file for bankruptcy in September because regulators lacked the authority to wind down a non-bank firm.

At the same time, he said that the financial system remains “fragile” and that he wouldn’t “advocate” letting systemically important firms collapse.

The Fed will help keep the U.S. dollar strong by containing inflation, and will withdraw credit from the financial system in a “timely” way, Bernanke said. He reiterated that he’s “certain” the dollar will be the main reserve currency for the “foreseeable future.”

Strong Dollar

He said the dollar will remain strong “because the U.S. economy is strong” and because the Fed is committed to ensuring price stability.

Central bankers are currently “being very aggressive” in expanding credit to avert the risk of deflation, “which I now believe is receding, but certainly needs not to be ignored,” Bernanke said. Balancing inflation and deflation risks is a “very difficult situation,” he said.

The Fed chief said May 7 the findings should reassure investors about the soundness of the financial system. Yesterday’s comments elaborate on statements Bernanke and regulators issued with the results. The U.S. government “stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn,” Bernanke said at the time.

The Treasury has injected more than $200 billion of taxpayer funds into financial institutions in an effort to boost confidence and capital. Congress has increased scrutiny over the investments and passed legislation limiting bonuses at institutions supported by public cash.

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