Bernanke says banks need bigger capital buffer

STONE MOUNTAIN, Georgia Tue Apr 10, 2012 3:42pm EDT

Federal Reserve Chairman Ben Bernanke addresses a group of economists and finance experts at a conference in Stone Mountain, Georgia April 9, 2012. REUTERS/Tami Chappell

Federal Reserve Chairman Ben Bernanke addresses a group of economists and finance experts at a conference in Stone Mountain, Georgia April 9, 2012.

Credit: Reuters/Tami Chappell

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STONE MOUNTAIN, Georgia (Reuters) - Federal Reserve Chairman Ben Bernanke said on Monday banks need to have more capital at hand in order to ensure the financial system is stable.

Bernanke said regulators were taking steps to force financial institutions to hold higher capital buffers, even if they allow for a long period of implementation to prevent any market disruptions.

"We need to have higher capital, and that's what Basel III does," he said in response to questions at an Atlanta Fed conference, referring to the latest international effort to tighten bank oversight. "That's essential for a stable financial system."

Bernanke made the comments the same day that an international bank lobby group, the Institute of International Finance, urged policymakers to pause in regulating the industry.

Toughened capital standards, new liquidity requirements and rules that limit activities all restrict banks' ability to provide businesses and households with the credit needed to lift economic growth, the IIF said in a letter to central bankers and finance ministers.

Whether big banks have sufficient levels of capital to protect against possible losses has been an ongoing source of contention. A call by the head of the International Monetary Fund, Christine Lagarde, last year for European banks to raise up to 200 billion euros in new capital was quickly rejected by European politicians.

In his prepared remarks on Monday, Bernanke said the U.S. economy has yet to fully recover from the effects of the financial crisis, and regulators must continue to find new ways to strengthen the banking system.

"The heavy human and economic costs of the crisis underscore the importance of taking all necessary steps to avoid a repeat of the events of the past few years," Bernanke said.

In a speech that did not touch directly on the outlook for economic growth or monetary policy, Bernanke focused on the lingering blind spots for financial authorities trying to prevent a repeat of the 2008-2009 meltdown.

He said financial stability matters had historically played second fiddle to monetary policy issues in the list of central bank priorities, but the crisis changed that.

"Financial stability policy has taken on greater prominence and is now generally considered to stand on an equal footing with monetary policy as a critical responsibility of central banks," he said.

Bernanke said recent bank stress tests will become a regular feature of the supervisory landscape, and for that reason the latest round of tests is being reviewed to identify possible areas of improvement in "execution and communication."

He reiterated a worry that he and other top policymakers have expressed about the continued vulnerability of money market funds.

"Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration," Bernanke said.

"The risk of runs ... remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available," he said.

(Reporting By Pedro da Costa; Editing by Leslie Adler)

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Comments (18)
OnAnIsland wrote:
In other words all but three banks have passed the stress test and have sufficient funds start lending operations independent of Fanny Mae, Freddie Mac and the Federal Government. This jeopardizes the fed’s equity position on mortgage derivatives for higher cost home loans so we better stop them from doing that. See how simple it is to understand political double talk.

Apr 09, 2012 10:22pm EDT  --  Report as abuse
OnAnIsland wrote:
Since all but three banks passed the stress test, they could start independent mortgage lending. This would jeopardize the feds position in higher interest derivatives if more people are allowed to refinance into lower interest mortgages. Then we need to protect the feds position before we allow a free marketplace.

Apr 09, 2012 10:49pm EDT  --  Report as abuse
flashrooster wrote:
Here’s a rare clear-cut example of where a regulation is needed. Banks will fight it and, therefore, the Republicans won’t let it pass even though such a regulation would help protect the investments of the American public. Let’s just watch and see if this goes anywhere. Republicans will call it “government interference” or socialism, even though such regulations are designed to protect capitalism, not threaten it. The real threat to capitalism will come from widespread abuse of capitalism due to a lack of good regulations and oversight.

Apr 09, 2012 11:10pm EDT  --  Report as abuse
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