Bernanke urges banks to raise capital if needed

CHICAGO (Reuters) - Recent turmoil in financial markets underscores the need for banks to hold "generous" capital cushions, U.S. Federal Reserve Chairman Ben Bernanke said on Thursday as he urged them to actively raise money.

"I strongly urge financial institutions to remain proactive in their capital-raising efforts," Bernanke told a conference on bank structure and competition in Chicago. Analysts said the Fed was saying that banks need to step up their efforts to get past a credit crisis just as the U.S. central bank did.

"Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve," Bernanke said.

He said he has been encouraged at the success of many banks in raising new capital and praised foreign-owned sovereign wealth funds for the positive role they were playing as suppliers of badly needed capital.

"They have generally provided unleveraged, patient money, which is what is needed here. They have not asked for extensive control or management of the firms," Bernanke said. "So I think it has been very constructive to have had this source of funding coming into our banking systems."

CLEAR OUT LOSSES

Economist Cary Leahey of Decision Economics in New York said Bernanke was clearly telling banks to carry on with their efforts to not only raise capital but get rid of less productive assets as they have been doing since a credit crunch developed last year so that they can resume lending.

"The Fed thinks it's done a lot to ease the credit crisis and now the financial institutions have to pick up the ball and run with it," Leahey said.

Bernanke said regulators were pushing for better disclosure by banks to increase transparency and to bring greater market discipline on them. He said lax risk management at financial firms had contributed to credit turmoil.

Bernanke said, in hindsight, it was evident "problems occurred at each step of the credit-extension chain" and had contributed to the credit crisis that the economy encountered.

He said stiffened capital requirements set by the newly introduced Basel II regulatory standards will help bring more discipline to the industry but won't be a panacea.

"Although Basel II will by no means eliminate future episodes of financial turbulence, it should help to make financial institutions more resilient to shocks and thus enhance overall financial stability," Bernanke said.

RISKS MANAGEABLE

In response to questions, Bernanke said he did not think banks faced significant risk from the problems that big bond insurers like MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N) had run into as a result of losses on residential mortgages.

"The large financial guarantors have raised some capital and they have maintained their ratings, which is certainly good news," he said. "Our assessment is that the implications of the financial guarantors' situation for banks are moderate and manageable relative to the capital of those banks."

Bernanke acknowledged financial turbulence is not yet fully past but pointed to evidence that lenders already were taking the remedial steps for an eventual return to normal conditions.

"I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital from diverse sources," Bernanke said.

"Importantly, capital raising and balance sheet repair allow for the extension of new credit, which supports economic expansion," he added.

(Additional reporting by Alister Bull; Writing by Emily Kaiser and Glenn Somerville in Washington; Editing by Neil Stempleman)