WASHINGTON The following are highlights of Federal Reserve Chairman Ben Bernanke's testimony on Tuesday to the Senate Banking Committee on the Fed semiannual report on monetary policy and the economy.
BERNANKE ON FAILURE OF SYSTEMICALLY CRITICAL FIRM:
"I think what's missing is a comprehensive resolution authority, a set of rules and guidelines, which explain how the government in general would address the potential failure of a systemically critical firm. Until it is safe to close a big firm, you are going to be forced to take actions to avoid it. I would be very happy to get rid of the 5 percent of my balance sheet which is tied up to these kind of extraordinary rescue efforts."
BERNANKE ON RETURNING BANKS TO HEALTH
"If I thought the banks were irrevocably damaged, I would have a different view, but I do believe our major banks have significant franchise values. And one of the things that we've learned is that when the government takes over a company that one of the things that happens immediately is that the counterparties start pulling away, the franchise value, the brand name starts to erode very quickly. So, I think, if we can through our regulatory process, we can get the banks to perform better and to improve, then the time may come when if they don't succeed in doing that when it will be appropriate to shut them down and so on. But for the moment, I think the right strategy is transparency -- find out what we can about their true status -- and to try to find the minimally disruptive way to get them into an improved position. And I think those things are feasible right now. ... There is no commitment by any means to never shut down a big bank, absolutely not, but I do believe that the major banks we have now can be stabilized and in the near-term it's important to do so."
BERNANKE ON U.S. BANKS NOT BEING ZOMBIES
"I think zombie was not an appropriate description of any of the banks. I think they all have substantial franchise value, they are all lending, they're all active, they have substantial international franchise. I don't think that's an accurate description. The point I want to make is that even as we put capital into these banks, we are not standing by and letting them do what they want, to take risks or continue to operate in an inefficient manner. We are going to be tough on them to make sure, along with the private shareholders who still have an interest, to make sure they take whatever drastic steps are necessary to restore themselves to profitability. That's what's going to make them eventually interesting to private investors."
BERNANKE ON BANK CAPITAL:
"What we are doing here is, again, trying to assess how much capital these banks need in order to fulfill the function even in a stressed scenario. So we are going to do an honest evaluation, we (are) going to do a tough evaluation, to try to figure out how much hole there is if there is a hole. In many cases there is not a hole."
BERNANKE ON BANK STRESS TEST:
"The outcome of the stress test is not going to be fail or pass. The outcome of the stress test is how much capital does this bank need in order to meet the credit needs of borrowers in our economy. We don't need majority ownership to work with the banks, we have very strong supervisory oversight. We can work with them now, to get them to do whatever is necessary to restructure, to take whatever steps are needed to become profitable again to get rid of bad assets. We don't have to take them over to do that. ...
"There is a too-big-to-fail problem which is very severe, but we need to think hard going forward about how to address that problem. I absolutely agree that it is a big problem but right now we are in the middle of the crisis."
BERNANKE ON ATTRACTING PRIVATE CAPITAL TO BANKS:
Asked why anyone would buy common stock in top U.S. banks today, he replied: "Well, they wouldn't today, but I think eventually they will as all the elements of the program work together to take off bad assets, to recapitalize them, to get them restructured. ... If a bank does become insolvent then the FDIC, of course, will intervene. But we're not close to that, all the banks are above their regulatory (capital)."
BERNANKE ON FED POTENTIAL TO BUY U.S. TREASURIES:
"Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes. We are prepared and we want to keep the option open to buy Treasury securities, if we think that is the best way to improve the functioning or reduce interest rates in private markets. We do have a couple of other things going on at the moment, one is the purchases of agency MBS and securities and the other is the proposed expansion of the TALF. We will keep that option open, but we are looking at some other ways of addressing the private market flow."
BERNANKE ON OPENING UP BANK AND NON-BANK LENDING:
"We have gone beyond interest rate policy to try to find new ways to ease credit markets and I've talked about it in recent speeches and testimonies. Three general types of things we've done. The first is to make sure there is plenty of liquidity for banks and other financial institutions not only in the United States but around the world in dollars. So we have been lending to banks, make sure they have enough cash left for liquidity so they won't be afraid of loss of liquidity."
"Secondly, as I already indicated, we've been involved in purchasing GSE securities, which has brought down mortgage rates.
"The third group of activities encompasses a number of different programs which have been focused primarily on getting non-bank credit markets functioning again. We were involved, for example, in doing some backstop lending to try to stabilize the money market mutual funds and also to stabilize the commercial paper market. We've had success in bringing down commercial paper rates and commercial paper spreads and giving firms access to longer term money than they were getting in September and October.
BERNANKE ON PAYING INTEREST ON BANK RESERVES:
"The banks are nervous about lending given their concerns about their own capital positions and about risk aversion and credit issues in the market place. In a way, what the Fed is doing is borrowing by paying interest on reserves to the banks. That's where we get the money and we're standing in between the banks and the marketplace using that money, recycling it into commercial paper, asset-backed securities and other forms of credit. In a way we are becoming the counterparty between the markets and the banks. When the banks feel they have opportunities to invest, they will. That will begin to create expansion in credit and money supply. That will be the signal for the Fed to begin to pull back. Right now, it's clear banks are more willing to hold reserves than they are to make loans."
BERNANKE ON DEMAND FOR U.S. TREASURIES:
"It seems to be, at least for now, that the dollar and U.S. debt are still very attractive around the world. There is a lot of demand for holding our Treasuries. That being said, we can't go running trillion dollar deficits indefinitely and it's going to be very important as we emerge from the crisis, as we begin to go into recovery stage, that we get control of the fiscal situation and begin to bring down the deficit to a sustainable level. For the moment, foreign demand for U.S. securities is strong, but if we don't get control eventually they are going to lose confidence."
BERNANKE ON INFLATION:
"Our view is that over the next couple of years, inflation, if anything, is going to be lower than normal, given how much commodity prices have come down, given how much slack there is in the economy. When the economy begins to recover, it's important to raise interest rates and do what is necessary to prevent an overheating that would lead to inflation down the road. We are confident we can do that. Every time we use our balance sheet to try and support the economy, we are thinking about how can we unwind that in a way that would be timely and allow us to take the actions we need to take."
BERNANKE ON EUROPEAN BANKS:
"The entire industrial world has suffered from this credit crisis. Many banks in Europe and the UK have taken very significant losses. The UK has been involved in intervention, the Irish, the Germans have been involved in interventions. It depends country by country. It's obvious there have been very significant problems in the European banking system. They face some issues which we have not faced to the same degree. For example, recent concerns about Eastern Europe and the exposure they have in that direction. The Europeans have been somewhat more reluctant to engage in the fiscal expansion that we have, although they have taken steps in that direction. They are working also along similar lines as the United States to deal with capitalization. We can improve our situation. A complete recovery would require a global recovery."