Banks must come clean so Fed can help: Rosengren

By Jon Herskovitz

SEOUL (Reuters) - The Federal Reserve must exercise its supervisory authority over banks in order to gain access to confidential financial information that will enable it to make sound decisions, a top central bank official said.

Boston Fed President Eric Rosengren said in prepared remarks on Friday that public earnings statements often do not offer enough of a basis for prudent policy.

"While U.S. banks report detailed information on their balance sheets and their income statements, these reports do not provide sufficient information to allow central banks to really discern how banks are responding to problems," Rosengren said in remarks for delivery to the Bank of Korea and Bank of International Settlements Seminar.

Troubles that began with rising mortgage defaults has since infected the broader financial system, igniting the worst credit crisis in decades.

Rosengren said the turbulence was difficult to foresee because bank models focused solely on their exposure to riskier assets like subprime mortgages, ignoring the possible knock-on effects on other sectors.

"What these stress tests crucially failed to capture was the effect of house price declines on the large holdings of highly rated securities that global banks held -- the products of mortgage securitization activities, with their payment streams ultimately tied to the performance of subprime loans," he said.

The belief that housing prices would never fall on a national basis, which permeated even the Fed itself, was partly to blame for this underestimation of risk, Rosengren said.

But the belief that investors would be discerning about dumping the sectors directly affected by defaults was also a culprit, he added.