Fed to begin new bank stress tests in weeks: Yellen

The Federal Reserve will begin a new round of bank stress tests in a couple of weeks, a top Fed official said on Friday, warning that strains from Europe's debt crisis threaten the U.S. economy and financial system.

Concerns about European fiscal and banking issues have contributed to strains in global financial markets that pose significant downside risks to the U.S. economic outlook, Fed Vice Chair Janet Yellen said in remarks prepared for delivery to a conference on the role of central banks in financial stability, sponsored by the Chicago Fed and the European Central Bank

While U.S. banks have manageable direct exposure to sovereign debt in the smaller European countries, they have substantial links to banks in larger European countries, some of which are facing funding difficulties, Yellen said.

In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States, she said. We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system.

Since the 2007-2009 financial crisis, the Fed has conducted periodic tests of banks' capacity to withstand crises, some of which have resulted in calls for banks to raise capital. The Fed will begin its 2012 round of stress tests in a couple of weeks, Yellen said on Friday.

Italy's political and economic turmoil has spurred fears of a possible break-up of the euro zone, with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to afford a bailout should there be a need for one.

Fears over Italy eased somewhat on Thursday as the country moved closer to a national unity government, following Greece's lead in seeking a respected veteran technocrat to pilot painful economic reforms in an effort to avert a euro zone bond market meltdown.

(Reporting by Ann Saphir, Editing by Chizu Nomiyama)