Bernanke: Banks Need to Test for Other Risks

The work done thus far by banks to raise capital is "encouraging," says Federal Reserve Chairman Ben Bernanke, who requests firms to identify other risks through internal stress tests.

Banks, particularly those with "trading and investment banking businesses," should keep monitoring "operational, liquidity and reputational risks," which weren't addressed by the stress tests, says Bernanke. He spoke to a group at a Fed conference in Jekyll Island, GA on Monday evening.

His words mark the close eye that the Federal Reserve and other federal banking regulators plan to have on firms such as Morgan Stanley, Goldman Sachs after the failure of Lehman Brothers last fall and the near failure of Bear Stearns. The Federal Reserve led stress tests of the 19 largest domestic banks, revealing that 10 of them need to raise a total of $75 billion in additional capital.

Ideally, Bernanke says the stress tests used in the assessment program should be part of a broader palette of internal stress tests conducted by firms. "Indeed, we do not intend that the capital assessments should be taken as all that those firms need to do." The federal regulators estimate that losses under more adverse economic conditions may total almost $600 billion over two years. If it helps reduce uncertainty among investors regarding future losses and capital needs, and "thereby improves the banking system's access to private capital, one of the key objectives of the program will have been achieved," Bernanke says. "Initial indications are encouraging." He sees that banks are "well ahead" in finding ways to increase capital, and several have already announced plans to raise equity or issue long-term debt not guaranteed by the FDIC. Bernanke didn't discuss the economic outlook or monetary policy in his speech. He did respond to a question about the Lehman failure, saying the central bank had no option other than to let the investment bank fail because regulators didn't have the authority to wind down a non-bank firm. He added the financial system remains "fragile" and that he wouldn't "advocate" letting systemically important firms collapse.


About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.




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