Federal Reserve officials are stepping up scrutiny of the biggest US banks to ensure the lenders can withstand a reversal of soaring global-asset prices, according to people with knowledge of the matter.
Supervisors are examining whether banks such as JPMorgan Chase & Co, Morgan Stanley and Goldman Sachs Group Inc have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.
Lawmakers led by Senator Christopher Dodd have criticised the Fed for failing to prevent a decline in lending standards that contributed to the credit crisis.
The central bank’s monitoring takes on renewed urgency as Chairman Ben S Bernanke’s pledge to keep the benchmark interest rate near zero for “an extended period” is helping to fuel a surge in assets. The MSCI AC World stock index is up 70 per cent since hitting a recession low on March 9. Gold reached an all-time high of $1,150.60 an ounce on Friday.
The policy was raising the “systemic risk” of new asset bubbles, Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co, said in a note posted on the Newport Beach, California-based company’s website. Finance officials in Asia say a bubble fuelled by the Fed’s low rates has already arrived.
Fed powers debated
More taxpayer-funded bailouts following the rescues of insurer American International Group Inc and Citigroup Inc, the third-largest US bank by assets, would stoke public anger against the Fed as Congress debates whether to reduce its powers and independence. Andrew Stern, president of the Service Employees International Union, led a protest rally of 150 people outside of Goldman Sachs’ Washington office November 16.
“The Fed staff has to be under a massive amount of pressure,” said Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute in Washington. “They must have a sense of zero tolerance for failure.”
Banks might not like “leverage ratios or capital requirements, but they can be effective and protect against the really bad behaviour,” he said.
Such controls are critical to economic recovery because they can help ensure that large banks aren’t hurt by swings in the capital markets. Banks are still clamping down on credit to consumers and businesses, even though gross domestic product expanded at a 3.5 per cent annual pace in the third quarter after a yearlong contraction.
Writedowns effect
“You want to have as much capital in these firms as you possibly can to withstand asset writedowns,” William Cohan, author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” about the collapse of Bear Stearns Cos, said.
Total loan originations in September at Bank of America Corp, the largest US bank by assets, fell 6 per cent to $53.6 billion from a month earlier, according to a Treasury Department report this week. The cause of the decline was “decreased demand for loans in the weak economy as companies and individuals look to reduce debt,” said Scott Silvestri, a spokesman for the Charlotte, North Carolina-based company.
New loans at Wells Fargo & Co, the nation’s fourth-biggest lender by assets, dropped 14 per cent to $47.4 billion. “We continued to supply credit to US consumers, small businesses and large corporations with over $547 billion of new credit extended to customers through the third quarter this year,” said Mary Eshet, a spokeswoman for the San Francisco-based bank. “In a slower economic cycle, commercial loan demand is naturally weaker.”
TARP
Taxpayers shored up the financial system with the $700-billion Troubled Asset Relief Program (TARP). Another round of bailouts would likely stir up more congressional ire.
“My constituents, they’re not just anxious, they are mad,” Representative Michael Burgess, a Republican from Ft Worth, Texas, told Treasury Secretary Timothy Geithner at a hearing of the Joint Economic Committee yesterday.
Under TARP’s capital-purchase programme, the Treasury injected about $205 billion into more than 600 financial institutions of all sizes as of November 13, according to department figures.
John Mack, chief executive officer of Morgan Stanley, said banks’ behaviour justified a Fed crackdown. “We cannot control ourselves,” he said yesterday at a panel discussion hosted by Bloomberg News and Vanity Fair at Bloomberg LP’S headquarters in New York. “You have to step in and control the Street.”
The Fed is already under pressure from Dodd, chairman of the Senate Banking Committee, who proposed legislation November 10 to strip the central bank of its supervisory authority. The Connecticut Democrat’s move strikes at the core of efforts by Bernanke, 55, and Governor Daniel Tarullo, 57, to overhaul Fed supervision and increase monitoring of risks to the financial system.
Tarullo, President Barack Obama’s first appointee to the central bank, is making greater use of so-called horizontal reviews that compare several banks’ exposures and practices.
