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, Morgan Stanley and Goldman Sachs 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 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 71 per cent since hitting a recession low on March 9th. Gold reached an all-time high of $1,145.50 an ounce last Wednesday. The policy is raising the “systemic risk” of new asset bubbles, Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management, said in a note posted on the Newport Beach, California-based company’s website yesterday.
Finance officials in Asia say a bubble fuelled by the Fed’s low rates has already arrived. More taxpayer-funded bailouts following the rescues of insurer American International Group and Citigroup, 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 the Goldman Sachs Washington office earlier this week.
“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. 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 year-long contraction. – (Bloomberg)
