Bernanke: Banks Need to Test for Other RisksThe work done thus far by banks to raise capital is "encouraging," says Federal Reserve Chairman Ben Bernanke, who requests firms to identify other risks through internal stress tests.
Banks, particularly those with "trading and investment banking businesses," should keep monitoring "operational, liquidity and reputational risks," which weren't addressed by the stress tests, says Bernanke. He spoke to a group at a Fed conference in Jekyll Island, GA on Monday evening.
His words mark the close eye that the Federal Reserve and other federal banking regulators plan to have on firms such as Morgan Stanley, Goldman Sachs after the failure of Lehman Brothers last fall and the near failure of Bear Stearns. The Federal Reserve led stress tests of the 19 largest domestic banks, revealing that 10 of them need to raise a total of $75 billion in additional capital.
Ideally, Bernanke says the stress tests used in the assessment program should be part of a broader palette of internal stress tests conducted by firms. "Indeed, we do not intend that the capital assessments should be taken as all that those firms need to do." The federal regulators estimate that losses under more adverse economic conditions may total almost $600 billion over two years. If it helps reduce uncertainty among investors regarding future losses and capital needs, and "thereby improves the banking system's access to private capital, one of the key objectives of the program will have been achieved," Bernanke says. "Initial indications are encouraging." He sees that banks are "well ahead" in finding ways to increase capital, and several have already announced plans to raise equity or issue long-term debt not guaranteed by the FDIC. Bernanke didn't discuss the economic outlook or monetary policy in his speech. He did respond to a question about the Lehman failure, saying the central bank had no option other than to let the investment bank fail because regulators didn't have the authority to wind down a non-bank firm. He added the financial system remains "fragile" and that he wouldn't "advocate" letting systemically important firms collapse.