Federal Reserve Chairman Ben S. Bernanke said the U.S. banking system is stronger and more resilient while still facing challenges on credit quality and liquidity.
“Banks still have more to do to restore their health and adapt to the post-crisis regulatory and economic environment,” Bernanke said today in a speech at the Chicago Fed’s annual conference on banks. As the economic expansion proceeds, “a financially stronger banking system will be well positioned to expand its lending.”
Some large firms still face “challenges on the liquidity front” as they rely heavily on wholesale short-term funding, he said, and as government guarantees on some of their liabilities expire. Loan delinquency rates on credit-backed by commercial and residential real estate “remain elevated.”
The Fed has tightened bank oversight and stepped up its research on financial risk in the aftermath of the 2008-2009 credit crisis, which plunged the U.S. into the worst recession since the Great Depression and cost 8.8 million Americans their jobs. Bankers, including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, have told the Fed that oversight is too stringent and limits profitability.
The Fed is enacting rules aimed at boosting the capital of the largest financial institutions as required under the Dodd-Frank Act, the most sweeping overhaul of financial regulation since the 1930s. The Dodd-Frank law is aimed in part at ending taxpayer-funded bailouts. Bernanke didn’t speak about the central bank’s capital policies in today’s remarks, and he didn’t discuss monetary policy or the economic outlook.
The largest 19 banking institutions have increased their Tier 1 common equity to nearly $760 billion, an increase of more than $300 billion since 2009. Tier 1 common equity is “the best buffer against future losses,” Bernanke said.
“The Tier 1 common ratio for these firms, which compares this high-quality capital to risk-weighted assets, stood at 10.5 percent at the end of last year,” Bernanke said.
Bernanke cited the central bank’s 2012 stress tests showing that 15 out of the 19 banks, including Goldman Sachs Group Inc., JPMorgan and Bank of America Corp., would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock.
JPMorgan’s Dimon led Wall Street bosses in a closed-door meeting last week to lobby the Fed about softening proposed reforms that might crimp their profits.
The contingent, which included Bank of America’s Brian T. Moynihan and Goldman Sachs Group Inc.’s Lloyd C. Blankfein, pressed the Fed on rules they said would overstate trading risks and harm financial markets. They also discussed what they see as flaws in Fed stress tests designed to gauge the strength of the nation’s largest lenders.
In today’s speech, Bernanke said the U.S. economy is beginning to benefit from the improved health of the financial system.
“Credit conditions in the United States have improved significantly in a number of areas,” Bernanke said. “Many -- though certainly not all -- businesses and households are finding it easier to borrow than they did a few years ago.”
Mortgage lending is an exception, he said, a situation that will be “difficult to turn around quickly.” Among the reasons: the slow recovery of the economy and housing, uncertainty surrounding the future of the government-sponsored enterprises, the lack of a healthy private-label securitization market, and “cautious attitudes by lenders.”
Deployment of Capital
“There is going to be much more efficient deployment of capital” by banks, said Alok Sinha, a principal at Deloitte & Touche LLP. “A lot of the rules and regulations are intending to drive the banks back to traditional core banking.”
Higher capital standards imposed by regulators will probably undermine bank profitability unless financial institutions alter their business models or charge consumers and businesses higher fees, said R. Scott Siefers, a managing director at Sandler O’Neill Partners, a New York brokerage firm specializing in financial stocks.
“There is no question that profitability will be lower,” Siefers said before Bernanke spoke. “The magnitude is the question mark.”
Stocks rose today, with the Standard & Poor’s 500 Index climbing 0.4 percent to 1,360.50 as of 2:57 p.m. in New York, as Greece attempted to form a new government and a decline in American jobless claims helped allay concern of a labor market setback.
The KBW Bank Index, which tracks 24 large U.S. banks, rose 1.2 percent. The index has increased 19 percent this year, compared with an 8.2 percent advance for the S&P 500.
Investor confidence has gained as regulators demand that banks improve underwriting, get a better grip on risk and maintain enough capital to weather another deep recession, said Eugene Ludwig, chief executive officer of Promontory Financial Group, a Washington consulting firm.
The Fed places so much emphasis on bank capital because “it is a definable, easily understandable number and something that helps restore confidence in institutions,” said Ludwig, who served as Comptroller of the Currency under President Bill Clinton.
“The U.S. banking system is dramatically better and capital standards are markedly up from where they were even before the crisis,” said Ludwig, who is also due to speak at the Chicago Fed conference.