January 15, 2009 / 8:22 PM / in 11 years

Fed's Lockhart: Banks still under stress

HATTIESBURG, Mississippi (Reuters) - Federal Reserve Bank of Atlanta President Dennis Lockhart said on Thursday more banks could fail and he expected the government to make fresh capital injections if it wins backing for more public aid.

“Banks remain under stress, so it would be hard to predict that there will be no more failures,” Lockhart told an event at the University of Southern Mississippi.

He noted there were 25 banks failures last year, including seven in the Southeast covered by the Atlanta Fed, and the industry remained in trouble.

“Behind that are business practices that were perhaps too reliant on wholesale funding and in many cases too concentrated in local real estate markets, and particularity residential real estate development,” he said.

Doubts have grown whether even the country’s top banks can cope with rising loan losses, and Lockhart specifically mentioned news reports about another public capital injection for Bank of America Corp (BAC.N).

He stressed that he did not know if this would happen but said similar action in the recent past had been positive.

“The capital injections to date have helped ... If the second $350 billion tranch of the TARP (Troubled Asset Relief Program) in fact is deployed, in all likelihood, some of that will be deployed to inject further capital into banks,” said Lockhart, a voting member of the Fed’s policy committee this year.

President George W Bush, acting at the request of President-elect Barack Obama, has asked Congress to release the second half of a $700 billion bank bailout agreed in October to save the financial system, which at the time looked close to collapse.

U.S. lawmakers are currently arguing about whether they should hand over the money and have complained that the capital injections have not stimulated much new lending.

Politicians are also acutely aware that many Americans are furious at the government for bailing out what they see as greedy bankers for self-inflicted mistakes, when many other businesses are being allowed to fail as unemployment soars.

Fed officials have strongly supported the TARP, arguing that if the banking system is not stabilized, it will be impossible to restore growth and end a year-long recession.

They have also moved aggressively to ease monetary policy, cutting interest rates last month almost to zero while pumping hundreds of billions of dollars into credit markets.

Critics worry that the massive expansion this action has caused in the country’s money supply could become inflationary when growth begins to recover. Lockhart said the emergency measures would be terminated when conditions allowed.

“When the banking system does return to more normal functioning, in all likelihood they are going to expire or run down ... I do not expect this set of policies will be permanent,” Lockhart said.

Writing by Alister Bull, Editing by Kenneth Barry

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