Bernanke offers aid to banks in trouble
May 14, 2008
By Craig Torres and Steve Matthews
Washington and Atlanta- Financial markets remained unsettled, US Federal Reserve chairman Ben Bernanke said yesterday, pledging to increase the central bank's auctions of cash to banks as needed.
While markets had improved, they remained "far from normal", Bernanke said in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. "We stand ready to increase the size of the auctions if further warranted by financial developments."
His comments contrast with those of treasury secretary Henry Paulson and Wall Street leaders including Vikram Pandit, the chief executive of Citigroup, who say the worst of the credit crisis is over.
Bernanke said it would take "some time" for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.
The flight from risk since last August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The Fed has made its own balance sheet available to banks and bond dealers through three new lending tools and an expansion of programmes.
These efforts had yielded "some improvement", said Bernanke. He noted that the steps raised questions regarding moral hazard, or protecting those who took on risk.
The central bank's extension of the federal safety net raised questions about whether the government should use taxpayer money to stem mortgage foreclosures.
"A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard," said Bernanke. The belief that the Fed was always standing by would give "financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk".
Bernanke did not discuss interest rates or the outlook for the economy.
|
|
