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Bernanke Says Banks Should Hold More Capital Against Downturns

Federal Reserve Chairman Ben S. Bernanke said banks should hold more capital to survive economic downturns, and that globally coordinated responses are needed to help the financial system weather crises.

Financial regulators around the world “are engaged in a historic and sweeping renovation of the global financial structure,” Bernanke said today in remarks prepared for delivery by video to the Conference of the Union of Arab Banks in Beirut, Lebanon.

“One of the most important goals is to ensure that banks hold more and higher-quality capital, and have sufficient liquid assets on hand, to be able to survive a market shock or severe economic downturn,” he said.

Lenders including JPMorgan Chase & Co. and Citigroup Inc. will have to show they can survive the demise of a trading partner or a plunge in value of high-risk business loans in the 2014 version of U.S. bank stress tests.

The scenarios for the annual tests, released this month by the Fed, reflect some of the most pressing threats seen by regulators as they gauge the ability of the U.S. financial system to withstand economic shocks. Bankers will have to show what would happen to the value of leveraged loans they hold, the impact of another housing bust and how they’d fare if a firm that owes them substantial sums collapses.

“International or regional financial crises require a coordinated response to safeguard the stability of the world’s financial system,” Bernanke said today.

Governments, central bankers, regulators and banks “still labor today in the long shadow cast by the global financial crisis,” Bernanke said.

Financial regulators also should push banks “to ensure their compensation practices link pay to performance and do not encourage excessive risk-taking,” he said.

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