Federal Reserve Chairman Ben Bernanke will warn Congress Wednesday that possible “contagion” from the European debt crisis for U.S. banks and money market funds remains "a concern” for the Fed and other financial regulators despite firms’ recent steps to reduce their exposure to countries and institutions there, according to testimony obtained by the FOX Business Network.
In particular, U.S. money market funds, with 35% of their assets in European holdings as of February, “remain structurally vulnerable” to Europe’s debt problems, Bernanke will tell the House Oversight and Government Reform Committee.
While he will tell lawmakers that “financial stresses in Europe have lessened” due to recent actions taken by European policymakers and that “U.S. financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree as the European situation has evolved…the risks of contagion remain a concern for both these institutions and their supervisors and regulators.”
He will again describe direct exposure of U.S. banks to “peripheral” countries like Greece as “limited,” but will say that U.S. firms’ exposures to European banks and to larger “core” countries “are more material.”
U.S. money market funds “remain structurally vulnerable despite some constructive steps, such as improved liquidity requirements, taken since the recent financial crisis,” he will add.
“Were the situation in Europe to take a severe turn for the worse, the U.S. financial sector likely would have to contend not only with problems stemming from its direct European exposures, but also with an array of broader market movements, including declines in global equity prices, increased credit costs, and reduced availability of funding,” Bernanke will tell lawmakers.
He will say the Fed, which in November helped Europe manage its debt problems by lending dollars to the European Central Bank, is prepared to offer more assistance if needed.
“For our part, the Federal Reserve will continue to monitor the situation closely, work with our financial institutions and foreign counterparts to enhance the resilience of our financial system, and be ready to use our tools to help stabilize U.S. markets should the situation require such action,” Bernanke will say.
Some lawmakers are concerned that Bernanke has not been specific enough about possible dangers of Europe’s debt problems to the U.S. financial system. Sources say some lawmakers plan to question Bernanke hard on this issue and will also ask him more about how the Fed and other agencies have prepared for potential banking problems in the U.S. should the crisis deepen -- and its potential costs to the U.S., especially taxpayers.
According to his testimony, Bernanke will seek to reassure committee members that the Fed’s latest “stress tests” took into account a worsening of Europe’s debt problems and that U.S. banks would have enough capital to survive and continue to operate with a big hit.
“This exercise was designed to capture both the direct and indirect exposures and vulnerabilities of U.S. financial institutions to the economic and financial stresses that might arise from a severe crisis in Europe,” Bernanke will say. “The results show that a significant majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical scenario.”
He will also push European leaders to do more to keep the continent’s debt problems under control.
“The recent reduction in financial stresses in Europe is a welcome development for the United States, given the important trade and financial linkages connecting our economies,” he will say. “However, Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilization. I believe that our European counterparts understand the challenges and risks they face and are committed to take the necessary steps to address those issues.”
Peter Barnes joined FOX Business Network (FBN) in September 2007. He serves as FBN's senior Washington correspondent.