Bernanke Aboard Stress Test Bandwagon

Federal Reserve Chairman Ben Bernanke on Monday defended the government’s stress tests on the 19 largest US banking institutions, calling them an “important element” of broader efforts to ensure the nation’s banking system could withstand a deeper downturn. The Fed released late last week the results of the government’s Supervisory Capital Assessment Program, which revealed 10 of the 19 institutions will require, collectively, equity of $185bn to ensure adequate capital cushions, should the economic scenario become more severe than expected. In such a case, without a buffer, additional losses at the 19 firms during 2009 and 2010 could total about $600bn, the government said. Projecting credit losses in an uncertain economic environment is difficult, Bernanke said, but the “intensive, painstaking nature” of the process gives the Fed confidence in the test’s results, and the public should take “considerable comfort” that the shortfalls of these banks have been identified, he said. “It was an enlightening exercise that will improve the toolkit we use to help ensure the safety and soundness not just of individual firms, but of the financial system more broadly,” Bernanke said at a conference in Jekyll Island, Ga. Bernanke championed the assessment as one that can be used to improve the nation’s supervisory processes, particularly by demonstrating the benefits of using cross-firm, cross-portfolio information and the simultaneous review of a number of major firms. “This approach allowed a broader analysis of risks than is possible within the traditional supervisory focus on individual institutions,” he said. Bernanke also expressed his confidence in the American dollar, saying it will remain the lead in currency both for reserves and transactions in the foreseeable future. “The issue at hand is whether or not the dollar will retain its value, and I think it will. I think it will be strong,” the nation’s top central banker said. Write to Kelly Curran.