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Bernanke says stress tests make banks more stable

Chairman of the the U.S. Federal Reserve Ben Bernanke speaks at the London School of Economics in London March 25, 2013. REUTERS/Jason Alden
Chairman of the the U.S. Federal Reserve Ben Bernanke speaks at the London School of Economics in London March 25, 2013. REUTERS/Jason Alden

By Pedro Nicolaci da Costa

STONE MOUNTAIN, Georgia (Reuters) - Federal Reserve Chairman Ben Bernanke said on Monday the central bank's periodic bank stress tests have made the financial system more resilient.

Contrasting the current state of banks to their tattered condition in 2009 after the historic financial crisis, Bernanke said the sector's rebound was positive for the broader recovery given the importance of credit to economic growth.

"The resilience of the U.S. banking system has greatly improved since then, and the more intensive use and greater sophistication of supervisory stress testing, as well as supervisors' increased emphasis on the effectiveness of banks' own capital planning processes, deserve some credit for that improvement," Bernanke told a conference on financial stability sponsored by the Atlanta Federal Reserve Bank.

In a speech that did not directly touch on the outlook for the economy and monetary policy, Bernanke hinted at why the central bank continues to pursue an extraordinarily easy monetary policy.

"The economy is significantly stronger than it was four years ago, although conditions are clearly still far from where we would all like them to be," he said.

Asked about how he felt about loose monetary policy in other advanced economies, Bernanke reiterated his view that it generally benefits all the nations involved.

"Most of the world's major industrial economies are engaged in expansionary monetary policy and on net I think that's mutually constructive," he said.

STRESS TEST CRITICS

Some critics have argued the Fed's stress tests are not sufficiently harsh, while banks have complained they do not fully understand the central bank's methodology.

The Fed has released scores for major bank holding companies that show how low their capital ratios would fall under proposed plans for dividends and stock buybacks if "severely adverse" economic conditions unfolded over the next two years.

Bernanke said providing too many details about the methodology could lead banks to curtail their own internal risk-management systems.

He argued U.S. financial institutions had bolstered their balance sheets by raising more capital. However, he said too many firms still rely too heavily on short-term sources of funding, raising some potential for trouble.

"In the area of liquidity and funding, continued improvement is still needed on some dimensions," he said. "Notably, supervisors will continue to press banks to reduce further their dependence on wholesale funding, which proved highly unreliable during the crisis."

Bernanke said it was important the stress test scenarios remain severe even as the economy improves so as to not generate complacency.

The Fed was widely criticized in the wake of the global financial crisis for missing the oncoming train wreck and being too lenient on banks that took excessive risks.

The crisis led to a series of unpopular bailouts of financial institutions that tarnished the central bank's reputation.

In response to a question, Bernanke dismissed the notion that financial reform had become too costly and burdensome. He said the crisis itself made clear that reforms were needed, adding the Fed routinely considers alternatives when implementing new rules.

(Reporting by Pedro Nicolaci da Costa; Editing by Neil Stempleman)

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