Bernanke: Financial turmoil in markets easing
WASHINGTON (AP) - May 13, 2008 The central bank has taken a number of unconventional steps -
especially since March, when the credit crisis intensified - to
help squeezed banks and big investment firms overcome problems and
try to get credit flowing more freely again.
Those efforts appear to be paying off and "have contributed to
some improvement in financing markets," the Fed chief said in
prepared remarks delivered via satellite to a financial markets
conference sponsored by the Federal Reserve Bank of Atlanta in Sea
Island, Ga.
Bernanke noted some improvements in the markets for certain
mortgage-backed securities, such as those backed by Fannie Mae and
Freddie Mac, as well as some fixed-rate mortgages and corporate
debt.
Moreover, the Fed's extraordinary decision in March to let
investment firms go to the Fed for emergency loans "seems to have
bolstered confidence," Bernanke said.
"These are welcome signs, of course, but at this stage
conditions in financial markets are still far from normal," he
said.
For instance, there are still strains involving a widely used
interest rate called the London interbank offered rate, or Libor,
Bernanke said. And "funding pressures" have also been evident in
the "strong participation" of commercial banks in a Fed auction
program that has made billions of dollars available in short-term
cash loans, he said.
Bernanke said the Fed policymakers "stand ready" to further
increase the size of these loans in the future if warranted by
financial developments.
In his speech, Bernanke did not talk about the Fed's next move
on interest rates or the broader state of the U.S. economy, which
many fear is on the edge of a recession or in one already.
To bolster the economy, the Fed last month cut a key interest
rate by one-quarter percentage point to 2 percent. At the same
time, policymakers indicated that their rate-cutting campaign,
which started in September, could be drawing to a close. If that
happens, many economists believe the Fed will focus more on its
various efforts to relieve stressed credit markets.
After a run on Bear Stearns pushed the nation's fifth-largest
investment bank to the brink of bankruptcy in March, fears grew
that others might be in jeopardy, given major stresses in credit
and financial markets at that time.
Scrambling to avert a market meltdown, the Fed - in the broadest
use of the central bank's lending authority since the 1930s -
agreed in March to temporarily let investment firms obtain
emergency financing from the Fed, a privilege previously granted
only to commercial banks. That's one of the Fed's most significant
actions.
The Fed also has moved to make cash loans to commercial banks
and to make super-safe Treasury securities available to investment
firms. All these efforts are aimed at bolstering confidence and
getting firms to behave in a more normal fashion so they'll be more
inclined to lend to each other, consumers and businesses.
Ultimately, financial companies will need to raise new capital
and improve risk management to address the fundamental sources of
financial strains, Bernanke said. "This process is likely to take
some time," he added.
And once financial conditions become more normal, the
extraordinary provisions to provide ready sources of cash to
financial institutions will no longer be needed, he said.
Even as the Fed has stepped in to provide such help, it also is
mindful of creating a "moral hazard," where financial
institutions might be more inclined to take certain risks if they
believe the Fed will be there to bail them out.
"The problem of moral hazard can perhaps be most effectively
addressed by prudential supervision and regulation that ensures
that financial institutions manage their liquidity risks
effectively in advance of the crisis," Bernanke said.
The Fed is reviewing its policies on this front to see if
improvements can be made, he said.
"Of course, even the most carefully crafted regulations cannot
ensure that liquidity crises will not happen again," Bernanke
said. But if moral hazard is mitigated and if financial
institutions and investors tighten up risk-management practices,
"the frequency and the severity of future crises should be
significantly reduced," he said.