Bernanke Urges `Hunkering' Banks to Raise Capital

[Barefootsies]

May 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke pushed banks to keep raising capital in the aftermath of losses from the credit crisis, so lenders can avert deeper damage to the U.S. economy.

``Firms are hunkering down,'' Bernanke said at a conference in Chicago today. ``They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.''

Bernanke's remarks reflect concerns he and other Fed officials expressed this week that financial markets have yet to return to normal. The Fed chief also said the central bank is considering strengthening its guidance to banks on how they manage risk after ``weaknesses'' that contributed to the crisis.

Banks and securities companies have raised about $244 billion of capital since July, after writedowns and credit losses in excess of $333 billion. Bernanke and Treasury Secretary Henry Paulson have repeatedly said firms should keep increasing their funds, seeking to alleviate the impact of the credit crunch.

``I strongly urge financial institutions to remain proactive in their capital-raising efforts,'' Bernanke said in the text of his speech. ``Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.''

Managing Risk

Bernanke said that senior bank executives need to take a leadership role in strengthening risk management. The strongest banks didn't rely on credit ratings companies and accounted for the danger of a slump in access to funds, he said.

``I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital,'' Bernanke said at the Chicago Fed conference on credit markets.

Bernanke spoke a day after former Fed Chairman Paul Volcker warned that the Fed's rescue of Bear Stearns Cos. and acceptance of mortgage debt from bond dealers increased the risk of political interference. U.S. regulators, including the Fed, have begun an analysis of how markets and regulatory enforcement failed and led to the credit crisis.

Threat to Growth

Sovereign wealth funds have contributed as much as a third of the capital banks have raised, which has been ``very positive,'' Bernanke said in response to questions. ``It has been very constructive to have this source of funding coming into our banking system,'' he said.

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. That has increased the threat to economic growth already posed by the worst housing recession in a quarter-century by making banks more reluctant to extend credit.

The Fed has created three new types of loans to financial companies since December to alleviate credit strains, including direct lending to firms other than commercial banks for the first time since the Great Depression.

Bernanke said the Fed was also conducting a review of how supervisors approach their bank examinations.

``Supervisors must redouble their efforts to help organizations improve their risk-management practices,'' Bernanke said.

Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee next meets June 24-25. Investors anticipate that the central bank's next move will be to raise, rather than lower, the benchmark rate from 2 percent, according to futures prices.

Bernanke said the credit crisis continues to confound the economy. ``Events continue to unfold,'' he said, adding that ``the financial stress we continue to experience'' stemmed from a separation of lending and distribution of credit to investors.

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