WASHINGTON (AP) - The government's unprecedented "stress
tests" of the nation's 19 largest banks should bolster Americans'
battered confidence in U.S. banking system, Federal Reserve
Chairman Ben Bernanke said Monday as he defended the rigor of the
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 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, Ga.
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.
Regulators determined that four of the banks - U.S. Bancorp.,
Capital One Financial Corp., BB&T Corp. and Bank of New York Mellon
Corp. - were sound enough to survive a deeper recession. Those
institutions announced Monday that they planned to issue stock to
help repay money the government doled out last year to shore up the
nation's banking system.
While that's 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
"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
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
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."
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