The government's unprecedented "stress tests" of the 19 largest U.S. banks should bolster Americans' battered confidence in U.S. banking system,
Federal Reserve Chairman Ben Bernanke said today as he defended the rigor of the exams.
The much-anticipated results, released Thursday, showed that 10 banks — including
Bank of America Corp.,
Wells Fargo & Co. and
Citigroup Inc. — must raise a total of $75 billion in new capital to absorb potential losses if the
recession were to take a turn for the worst.
The remaining nine — JPMorgan Chase & Co. and brokerage house
Goldman Sachs Group Inc. among them — had enough capital to withstand a deeper
recession.
"We hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion," Bernanke told a Fed conference on financial markets held at Jekyll Island, Georgia.
Wall Street did get a boost last week as the stress tests helped to push prices for bank stocks higher. However, that rally fizzled out on Monday as bank shares dragged the market lower.
Four of the banks judged sound enough to survive a deeper
recession — U.S. Bancorp.,
Capital One Financial Corp., BB&T Corp. and Bank of New York Mellon Corp. — announced Monday that they planned to issue stock to help repay money the government doled out last year.
While that is a good sign that banks can again turn to Wall Street to raise money by selling stocks, the reality of extra shares pouring into the market weighed on financial stocks.
Bernanke said it would take time to evaluate whether the stress-test process helps to reduce the uncertainty that has hung over investors and the economy about banks' future losses and capital needs.
"However, the initial indications are encouraging," he said.
Each of the 10 banks requiring an extra capital buffer against potential losses has pledged to have this additional cushion in place by a Nov. 9 deadline, Bernanke said.
Many banks are already "well ahead" in finding private-sector options for increasing their capital base by selling shares and several have announced plans for new stock issues, he added. And, several banks have announced plans to issue long-term debt not guaranteed by the Federal Deposit Insurance Corp., another positive sign, Bernanke said.
"We hope that in two or three years we will be able to reflect on the banking system's return to health with a sharply diminished reliance on government capital," Bernanke said.
The Fed chief also defended the soundness of the bank exams, saying estimates regulators used to determine the needed capital buffers were "appropriately conservative." Some Wall Street analysts have questioned whether the tests were rigorous enough.
Going forward, lessons learned from the stress tests should help guide the government's process of overseeing banks, Bernanke said.
"It was an enlightening exercise that will improve the tool kit we use to help ensure the safety and soundness not just of individual firms but of the financial system more broadly," he said.
Bernanke once again stressed the need for banking supervisors to not only assess the health of individual banks but to evaluate the soundness of the banking system as a whole.
Fielding questions after his speech, Bernanke said he believes the dollar will regain value. "The dollar will be strong," he said, because the Fed is committed to making sure that prices are stable.
One of the reasons why the Fed has been so aggressive in terms of slashing interest rates to a record low near zero and turning to unconventional ways to lift the country out of
recession is because "we are trying to avoid another form of price instability, which is deflation," he said.
Deflation refers to a widespread and prolonged decline in retail prices, wages and asset values, such as stocks and homes.
The risk of deflation is "receding but it certainly needs not to be ignored," Bernanke said.
Bernanke also said big, globally interconnected financial firms whose failure could endanger the U.S. economy should be subject to "additional supervision" to make sure they are "restrained from taking too much risk."
