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WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke said nationalization of major U.S. banks isn't needed to ensure their viability, and could even erode their franchise value.
"We don't need majority ownership to work with the banks" and stabilize them, Mr. Bernanke said in testimony to the Senate Banking Committee.
MORE
* Read Ben Bernanke's Comments in Full
* Hoyer Eyes Temporary Bank Takeover
* Heard: Black Holes May Test Government Limits
* Real Time Econ: Not Nationalization, Partnerships
* Real Time Econ: Fix Housing or Finance First?
* Real Time Econ: V or L-Shaped Recovery?
"I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn't necessary," Mr. Bernanke said.
"I think what we can do is make sure they have enough capital to fulfill their function and at the same time we exert adequate control to make sure they are doing what's necessary to become healthy and viable in the long term," he said.
Mr. Bernanke's comments come as top Congressional Democrats raised the specter of temporary nationalization. Talk of nationalization has intensified amid reports that the government may take as much as a 40% stake in Citigroup Inc.
"It may well have [to be] for a period of time the Federal government [is] in a position where it has a majority interest, perhaps, or at least a significant minority interest of some of our largest financial institutions," House Majority Leader Steny Hoyer said Tuesday.
His comments were echoed by Sen. Charles Schumer (D., N.Y.), who said the existence of "zombie banks" could force the government's hand.
"For real zombie banks if there are any in that category, to come in, put in new management, put in new shareholders, and then bring it out and let the private sector run it, that may have to be done as a last resort," Schumer said.
[Bernanke] Landov
Federal Reserve Board Chairman Ben Bernanke delivers the semiannual monetary policy report to the Senate Banking, Housing Committee.
For his part, Mr. Bernanke said "zombie" is an inaccurate way to describe banks. They still have significant franchise value, Mr. Bernanke said, that would erode if the government were to take them over.
He also emphasized Tuesday that stress tests regulators will be conducting on the nation's 19 largest banks won't be "pass-fail" tests. Rather, the goal is to assess how much capital banks may need, Mr. Bernanke said.
He assured lawmakers that banks will not be allowed to hide anything or provide inadequate information when regulators assess the soundness of bank balance sheets under tough economic scenarios.
Mr. Bernanke also said that while the Fed is keeping open the option of buying longer-dated Treasury securities, the central bank is mostly focused on other efforts to aid private markets -- such as a lending program to boost consumer lending and other efforts to buy mortgage-backed securities.
"Our objective is to improve the function of private credit markets so that people can borrow for all kinds of purposes," he said. "We are prepared and we want to keep the option open to buy Treasury securities if we think that's the best way to" improve the functioning of private markets.
However, he added that the Fed's purchases of agency and mortgage-backed securities and its work on the Term Asset-Backed Securities Loan Facility, or TALF, are "taking up a lot of our attention in the short run." The TALF is designed to improve credit in markets backed by consumer-linked assets including credit cards, automobile and student loans as well as small business loans.
While the Fed is keeping open the option of buying longer-dates Treasurys, the Fed is also looking at some other ways of addressing private markets as well, he said.
Recession Should End in 2009
Mr. Bernanke said Tuesday that the recession should end this year and 2010 "will be a year of recovery," if actions taken by the government lead to some stabilization in financial markets.
But that's a mighty "if" given recent severe declines in equity markets to levels not seen in more than a decade despite repeated announcements of government bank and housing rescue plans.
And Mr. Bernanke's hopeful forecast contained caveats, the main one being that officials must successfully break what he called an "adverse feedback loop" in which economic and financial strains become self-reinforcing.
"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Mr. Bernanke said in prepared remarks to the Senate Banking Committee.
But for now, the U.S. is undergoing a "severe contraction," Mr. Bernanke said, that "appears to have continued into the first quarter of 2009."
The economy contracted 3.8%, at an annual rate, during the fourth quarter. Wall Street economists think that could be revised to show as much as a 5% decline based on December data. Gross domestic product could plunge at roughly another 5% rate this quarter before steadying somewhat around the middle of the year, economists expect.
Answering questions from the senators, Mr. Bernanke said the financial markets should improve when the economy starts to recover. "I do believe that once the economy begins to recover, we will see improvement in the financial market," he said at a Senate Banking Committee hearing, adding those two go together.
Mr. Bernanke added, in response to a question from Sen. Christopher Dodd (D., Conn.) some people will find their assets aren't adequate to retire immediately.
"Many people have suffered in regard to asset values," he said. "I understand this is a very difficult situation for savers" as it is for workers and homeowners.
Still, he noted the financial markets should improve once the economy begins to revive.
Mr. Bernanke added housing is central to the economic recovery. "I would anticipate some stabilization in the housing market going forward," he said.
He added people are "very reluctant to make commitments to automobiles," but as confidence returns to the market, the auto sector and housing market should improve. "Those areas will begin to strengthen and we'll see broad-based recovery."
Mr. Bernanke said major banks meet current capital standards, but going forward, officials need to think about ways to be more aggressive in determining what financial firms' risks are, and he said banks need to be more conservative in stress testing.
"We need to look at a variety of other things like off-balance-sheet exposures," he added.
Forecast Subject to Uncertainty
In his testimony, Mr. Bernanke reiterated the Fed's latest economic forecasts released last week along with the minutes of the January meeting. Forecasts for the unemployment rate at the end of 2009 are centered between 8.5% and 8.8%, versus the 7.6% rate in January. The economy is expected to contract 0.5% to 1.3% this year before recovering between 2.5% and 3.25% in 2010. Officials expect even faster growth in 2011.
Explaining that somewhat optimistic scenario, Mr. Bernanke said that if financial markets improve, "the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit."
However, Mr. Bernanke warned the economic forecast "is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside."
He noted that housing remains "very weak," with home prices continuing to fall and foreclosure starts "at very high levels." And while there have been some improvements in short-term credit markets, corporate risk spreads and mortgage rates, "most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure," Mr. Bernanke said.
Having already lowered the target federal funds rate to near zero in December -- or "near its floor," according to Mr. Bernanke -- Fed officials have few options other than credit programs financed through a massive expansion of the Fed's balance sheet to almost $2 trillion. Mr. Bernanke said interest rates should stay "exceptionally low ... for some time," reiterating the Fed's last policy statement.
WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke said nationalization of major U.S. banks isn't needed to ensure their viability, and could even erode their franchise value.
"We don't need majority ownership to work with the banks" and stabilize them, Mr. Bernanke said in testimony to the Senate Banking Committee.
MORE
* Read Ben Bernanke's Comments in Full
* Hoyer Eyes Temporary Bank Takeover
* Heard: Black Holes May Test Government Limits
* Real Time Econ: Not Nationalization, Partnerships
* Real Time Econ: Fix Housing or Finance First?
* Real Time Econ: V or L-Shaped Recovery?
"I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn't necessary," Mr. Bernanke said.
"I think what we can do is make sure they have enough capital to fulfill their function and at the same time we exert adequate control to make sure they are doing what's necessary to become healthy and viable in the long term," he said.
Mr. Bernanke's comments come as top Congressional Democrats raised the specter of temporary nationalization. Talk of nationalization has intensified amid reports that the government may take as much as a 40% stake in Citigroup Inc.
"It may well have [to be] for a period of time the Federal government [is] in a position where it has a majority interest, perhaps, or at least a significant minority interest of some of our largest financial institutions," House Majority Leader Steny Hoyer said Tuesday.
His comments were echoed by Sen. Charles Schumer (D., N.Y.), who said the existence of "zombie banks" could force the government's hand.
"For real zombie banks if there are any in that category, to come in, put in new management, put in new shareholders, and then bring it out and let the private sector run it, that may have to be done as a last resort," Schumer said.
[Bernanke] Landov
Federal Reserve Board Chairman Ben Bernanke delivers the semiannual monetary policy report to the Senate Banking, Housing Committee.
For his part, Mr. Bernanke said "zombie" is an inaccurate way to describe banks. They still have significant franchise value, Mr. Bernanke said, that would erode if the government were to take them over.
He also emphasized Tuesday that stress tests regulators will be conducting on the nation's 19 largest banks won't be "pass-fail" tests. Rather, the goal is to assess how much capital banks may need, Mr. Bernanke said.
He assured lawmakers that banks will not be allowed to hide anything or provide inadequate information when regulators assess the soundness of bank balance sheets under tough economic scenarios.
Mr. Bernanke also said that while the Fed is keeping open the option of buying longer-dated Treasury securities, the central bank is mostly focused on other efforts to aid private markets -- such as a lending program to boost consumer lending and other efforts to buy mortgage-backed securities.
"Our objective is to improve the function of private credit markets so that people can borrow for all kinds of purposes," he said. "We are prepared and we want to keep the option open to buy Treasury securities if we think that's the best way to" improve the functioning of private markets.
However, he added that the Fed's purchases of agency and mortgage-backed securities and its work on the Term Asset-Backed Securities Loan Facility, or TALF, are "taking up a lot of our attention in the short run." The TALF is designed to improve credit in markets backed by consumer-linked assets including credit cards, automobile and student loans as well as small business loans.
While the Fed is keeping open the option of buying longer-dates Treasurys, the Fed is also looking at some other ways of addressing private markets as well, he said.
Recession Should End in 2009
Mr. Bernanke said Tuesday that the recession should end this year and 2010 "will be a year of recovery," if actions taken by the government lead to some stabilization in financial markets.
But that's a mighty "if" given recent severe declines in equity markets to levels not seen in more than a decade despite repeated announcements of government bank and housing rescue plans.
And Mr. Bernanke's hopeful forecast contained caveats, the main one being that officials must successfully break what he called an "adverse feedback loop" in which economic and financial strains become self-reinforcing.
"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Mr. Bernanke said in prepared remarks to the Senate Banking Committee.
But for now, the U.S. is undergoing a "severe contraction," Mr. Bernanke said, that "appears to have continued into the first quarter of 2009."
The economy contracted 3.8%, at an annual rate, during the fourth quarter. Wall Street economists think that could be revised to show as much as a 5% decline based on December data. Gross domestic product could plunge at roughly another 5% rate this quarter before steadying somewhat around the middle of the year, economists expect.
Answering questions from the senators, Mr. Bernanke said the financial markets should improve when the economy starts to recover. "I do believe that once the economy begins to recover, we will see improvement in the financial market," he said at a Senate Banking Committee hearing, adding those two go together.
Mr. Bernanke added, in response to a question from Sen. Christopher Dodd (D., Conn.) some people will find their assets aren't adequate to retire immediately.
"Many people have suffered in regard to asset values," he said. "I understand this is a very difficult situation for savers" as it is for workers and homeowners.
Still, he noted the financial markets should improve once the economy begins to revive.
Mr. Bernanke added housing is central to the economic recovery. "I would anticipate some stabilization in the housing market going forward," he said.
He added people are "very reluctant to make commitments to automobiles," but as confidence returns to the market, the auto sector and housing market should improve. "Those areas will begin to strengthen and we'll see broad-based recovery."
Mr. Bernanke said major banks meet current capital standards, but going forward, officials need to think about ways to be more aggressive in determining what financial firms' risks are, and he said banks need to be more conservative in stress testing.
"We need to look at a variety of other things like off-balance-sheet exposures," he added.
Forecast Subject to Uncertainty
In his testimony, Mr. Bernanke reiterated the Fed's latest economic forecasts released last week along with the minutes of the January meeting. Forecasts for the unemployment rate at the end of 2009 are centered between 8.5% and 8.8%, versus the 7.6% rate in January. The economy is expected to contract 0.5% to 1.3% this year before recovering between 2.5% and 3.25% in 2010. Officials expect even faster growth in 2011.
Explaining that somewhat optimistic scenario, Mr. Bernanke said that if financial markets improve, "the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit."
However, Mr. Bernanke warned the economic forecast "is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside."
He noted that housing remains "very weak," with home prices continuing to fall and foreclosure starts "at very high levels." And while there have been some improvements in short-term credit markets, corporate risk spreads and mortgage rates, "most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure," Mr. Bernanke said.
Having already lowered the target federal funds rate to near zero in December -- or "near its floor," according to Mr. Bernanke -- Fed officials have few options other than credit programs financed through a massive expansion of the Fed's balance sheet to almost $2 trillion. Mr. Bernanke said interest rates should stay "exceptionally low ... for some time," reiterating the Fed's last policy statement.
