All of the top 19 U.S. banks undergoing stress tests to gauge their ability to outlast an even deeper recession are solvent, and the exam results should reassure markets that banks can continue lending, Federal Reserve Chairman Ben Bernanke said on Thursday.
The results of the stress tests are due to be announced in detail at 5 p.m. EDT, including which banks are being required to add capital to buffer against a potential sharp downturn in the economy. The exams will establish capital buffers for each of the nation's 19 largest banks and lay out bank plans to boost capital if necessary.
(This) is not a solvency test, Bernanke said in response to questions after speaking to a conference organized by the Chicago Fed. All the banks, inclusive of the capital they received from the government, are solvent.
The Treasury Department launched the stress tests in February in a bid to draw private capital back in to the shattered banking system to revive lending.
Publication of test results will allow, I hope, markets to have greater confidence that they know the condition of the banks and can be reassured that banks will be strong and be able to lend even if the economy is worse than currently expected, Bernanke said.
The tests go beyond standard bank oversight by comparing results and projected losses among different banks, he said.
There is a greater level of consistency here and comparability than in anything that has ever been done before, he added.
Bernanke said the stress test process could help guide any overhaul of bank supervision and regulation that lawmakers and policy-makers are considering in the wake of the worst financial crisis since the Great Depression.
Increasing the effectiveness of bank supervision is a top priority for the Fed, and paying more attention to problems that could shake the entire financial system will enhance stability in the future, Bernanke said.
Bernanke said portions of banking law stand in the way of effective supervision and called on Congress to revise them. He cited differences among supervisory models for banking, insurance, and securities firms as an example.
We hope that the Congress will consider revising the provisions of Gramm-Leach-Bliley to help ensure that consolidated supervisors have the necessary tools and authorities to monitor and address safety and soundness concerns in all parts of an organization, he said.
Gramm-Leach-Bliley, enacted in 1999, substantially overhauled U.S. banking laws to allow consolidation of banks and financial service firms, including insurance and securities companies.
Discussing the Fed's aggressive actions to restore lending and revive economic activity in the deepest and longest recession in decades, Bernanke said the Fed had the tools it needs to soak up the more than $1 trillion in liquidity the U.S. central bank has pumped into the financial system.
(Reporting by Mark Felsenthal; Editing by James Dalgleish)