Bernanke says stress tests make banks more stable

Wednesday, 10 April 2013 02:40 - - {{hitsCtrl.values.hits}}

REUTERS: Federal Reserve Chairman Ben Bernanke said on Monday the central bank’s periodic bank stress tests have made the U.S. financial system more resilient.

Contrasting the current state of U.S. banks to their tattered condition in 2009 after the historic financial crisis, Bernanke said the sector’s rebound was positive for the broader recovery given the importance of credit to economic growth.

“The resilience of the U.S. banking system has greatly improved since then, and the more intensive use and greater sophistication of supervisory stress testing, as well as supervisors’ increased emphasis on the effectiveness of banks’ own capital planning processes, deserve some credit for that improvement,” Bernanke said in prepared remarks to a conference on financial stability sponsored by the Atlanta Federal Reserve Bank.

In a speech that did not directly touch on the outlook for the U.S. economy and monetary policy, Bernanke hinted at why the central bank continues to pursue an extraordinarily easy monetary policy.

“The economy is significantly stronger than it was four years ago, although conditions are clearly still far from where we would all like them to be,” he said.

Some critics have argued the Fed’s stress tests are not sufficiently harsh, while banks have complained they do not fully understand the central bank’s methodology.

The Fed has released scores for major bank holding companies that show how low their capital ratios would fall under proposed plans for dividends and stock buybacks if “severely adverse’ economic conditions unfolded over the next two years.

Bernanke said providing too many details about the methodology could lead banks to curtail their own internal risk-management systems.

He argued U.S. financial institutions had bolstered their balance sheets by raising more capital. However, he said too many firms still rely too heavily on short-term sources of funding, raising some potential for trouble.

“In the area of liquidity and funding, continued improvement is still needed on some dimensions,” he said. “Notably, supervisors will continue to press banks to reduce further their dependence on wholesale funding, which proved highly unreliable during the crisis.”

Bernanke said it was important the stress test scenarios remain severe even as the economy improves so as to not generate complacency.

The Fed was widely criticised in the wake of the global financial crisis for missing the oncoming train wreck and being too lenient on banks that took excessive risks.

The crisis led to a series of unpopular bailouts of financial institutions that tarnished the central bank’s reputation.