Washington - Federal Reserve Chairman Ben Bernanke says the threats
from Europe's debt crisis have eased in recent weeks, but U.S. money
market funds remain exposed to risky European assets.
In testimony prepared for a congressional hearing
Wednesday, Bernanke noted developments that have minimized the danger.
He pointed to bailout support that European leaders provided in exchange
for deep budget cuts by the Greek government and he highlighted the
agreement by private creditors to reduce Greece's debt.
But he said Europe must take further steps, including
strengthening its banking system still more and making "a significant
expansion of financial backstops" to guard against troubles in one
country spilling over to other nations.
"Europe's financial and economic situation remains
difficult, and it is critical that the European leaders follow through
on their policy commitments to ensure a lasting stabilization," Bernanke
said in remarks prepared for the House Committee on Oversight and
While U.S. financial institutions have reduced their
exposure to Europe, Bernanke said roughly 35% of assets in US
prime money market funds are European holdings.
"U.S. financial firms and money market funds have had
time to adjust their exposures and hedge their risks to some degree ...
but the risks of contagion remain a concern both for these institutions
and their supervisors and regulators," Bernanke said.
Bernanke said that if Europe took a severe turn for the
worse, the U.S. financial sector would have to contend not only with
problems stemming from its direct exposure to European loans and
investments but also with broader market movements including declines in
global stock prices, increased credit costs and reduce availability of
To address those broader risks, Bernanke noted, the Fed
conducted a stress test of 19 of the largest U.S. financial
institutions. Those tests, results of which were released last week,
found that all but four of the 19 were strong enough to sustain a major
economic downturn worse than the 2007-2009 Great Recession.
Bernanke said in his testimony that those results
showed that a "significant majority" of the largest U.S. banks would
have adequate capital to withstand large loan losses from an extremely
adverse situation. He said the tests were designed to capture both
direct and indirect exposures of U.S. banks "to the economic and
financial stresses that might arise from a severe crisis in Europe."
Bernanke and Treasury Secretary Timothy Geithner are both scheduled to appear before the House panel on Wednesday.
In his prepared testimony, Geithner said that the Obama
administration was encouraged by the steps that Europe has taken to
address the debt crisis.
"We hope European leaders will build on that progress
with additional actions to calm the financial tensions that have been so
damaging to global economic growth," Geithner said.