Financial stress in Europe has eased recently, but risks remain for U.S. financial institutions and money market funds, Federal Reserve Chairman Ben Bernanke said in remarks prepared for a Wednesday congressional hearing.
Strains on the European banking system could spread to the United States through U.S. financial institutions’ exposure to European banks and a broad market downturn, Bernanke said in testimony prepared for a Wednesday hearing of the House Committee on Oversight and Government Reform. In particular, U.S. money market funds could be at risk, Bernanke said, noting that 35% of their assets were in European holdings, as of February.
“These funds remain structurally vulnerable despite some constructive steps, such as improved liquidity requirements, taken since the recent financial crisis,” Bernanke said in his testimony, according to Dow Jones.
The U.S. financial sector could also be weakened if a downturn in Europe drags down global equity prices, raising the cost of borrowing money and making it harder to obtain credit. However, Bernanke noted that in the Federal Reserve’s recent bank stress tests, “a significant majority of the largest U.S. banks” would continue to have enough capital to weather a hypothetical severe recession.
Bernanke sounded some optimism over the situation in Europe, where he said financial stress has declined, contributing to “an improved tone of financial markets around the world, including in the United States.” The brightening is a result of recent policy actions, including the European Central Bank΄s long-term refinancing operations, steps taken to put Greece on a more sustainable fiscal path, and the European Union’s new fiscal compact treaty.
“The recent reduction in financial stresses in Europe is a welcome development for the United States,” Bernanke said, stressing that it is critical that European leaders implement the policies to which they have committed.
“Although progress has been made, more needs to be done,” he said. “Full resolution of the crisis will require a further strengthening of the European banking system,” by significantly expanding its financial backstop, often called a “firewall.”
The Fed will continue to monitor the situation closely, he said.
(source: Dow Jones, Capital)