Former Federal Reserve Chairman Alan Greenspan said the U.S. economy and financial markets had improved but warned that banks faced a capital shortfall, which could stall lending and obstruct a recovery, Bloomberg reported on Thursday.
Things have unquestionably improved, Greenspan was quoted as saying in an interview published on Bloomberg's website. They've improved everywhere in the world. It's remarkable.
There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded, he added.
The comments come after the Treasury Department and top banking regulators earlier this month released the result of regulatory stress tests of banks, using a hypothetical scenario that assumed a deepening recession.
The tests showed a combined capital shortfall of $74.6 billion for a group of 10 banks which was found to require extra funding. Each bank must submit a capital-raising plan by June 8, and then has until November 9 to implement it.
According to Bloomberg, Greenspan also said there was still potential for a mortgage crisis and that the financial crisis was not over: Until the price of homes flattens out we still have a very serious potential mortgage crisis.
Greenspan, who headed the U.S. central bank until 2006, also warned of the risks arising from the ongoing slump in home prices, which was threatening millions of borrowers.
We're on the edge and if this thing doesn't get resolved quickly I'm worried. He added that prices would only stabilize once the liquidation rate of single-family homes had peaked and that that had not happened yet.
Bloomberg said Greenspan estimates that U.S. gross domestic product will decline at an annual rate of 1 percent in the second quarter.
(Reporting by Jan Dahinten; Editing by Kazunori Takada)