Bernanke says Fed may continue bank loans into 2009

Wednesday, July 9, 2008 at 1:44am
Federal Reserve Chairman Ben S. Bernanke says the central bank may extend its emergency-loan program. He was speaking Tuesday at a Federal Deposit Insurance Corp. forum on mortgage lending. Bloomberg News

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation’s financial system, said yesterday that the central bank may extend its emergency-loan program for investment banks into next year.

“The Federal Reserve is strongly committed” to financial stability and is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end,” Bernanke said in a speech at a conference in Arlington, Va.

The Fed chairman’s comments come a day after Fannie Mae and Freddie Mac fell to their lowest level since 1992 and the Standard & Poor’s 500 Banks Index dropped to a 12-year low.

It marked the first time Bernanke has indicated how long he would extend the lending programs that were introduced in March in a provision of Fed credit to non-banks unprecedented since the Great Depression.

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank.

The Treasury should “take a leading role in any such process” in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

The Fed started the unprecedented lending programs for investment banks in March under its authority to lend to nonbanks in “unusual and exigent circumstances.” Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for “at least” six months.

Continued lending to investment banks may make it harder for the Fed to raise interest rates this year. Traders estimate 74 percent odds of at least quarter point increase in the 2 percent benchmark rate by year-end.

“There was some speculation that, come September,” the lending programs “might be allowed to expire,” said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York. “A lot of people would have thought that might be a prelude to the Fed beginning a tightening cycle. Now, that is obviously that much more uncertain.”

The S&P 500 Banks Index, a measure of 22 firms including Fannie Mae and Freddie Mac, the largest sources of U.S. home financing, fell to 155.48 on Monday, its lowest level since 1996.

Fannie Mae, based in Washington, and McLean, Va.-based Freddie Mac have dropped more than 60 percent this year, with declines accelerating in the past two weeks, on concern that the capital the companies have raised since December may not be enough to overcome writedowns.

Bernanke didn’t comment on the outlook for the economy or monetary policy in his remarks Tuesday to a Federal Deposit Insurance Corp. forum on mortgage lending.

The PDCF and the Fed's Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, are both aimed at the 20 primary dealers in U.S. government debt.

Fed officials are working with the Securities and Exchange Commission and securities dealers “to increase the firms' capital and liquidity buffers,” Bernanke said.

The remaining four major investment banks, after Bear Stearns Cos.'s takeover by JPMorgan, are Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc.

Bernanke said “it is worth the effort” for lawmakers to design a resolution “regime” for securities firms. Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair have also advocated such a mechanism, which already exists for commercial banks.

— Bloomberg News

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