By Steven K. Beckner

STONE MOUNTAIN, Ga. (MNI) – Federal Reserve Chairman Ben Bernanke
conceded Monday evening that higher bank capital requirements may make
loans more expensive, but contended the costs outweigh the benefits.

Bernanke, answering questions following a dinner address to the
Atlanta Federal Reserve Bank’s annual financial markets conference, said
he found “interesting” other nation’s use of “countercyclical” tools
designed to adjust credit availability during varying economic and
financial conditions. But he stopped well short of saying that U.S.
regulations governing mortgage underwriting should be relaxed to boost
the housing market.

He said the Fed’s capital “stress tests” are a kind of
countercyclical tool in a sense.

Despite Dodd-Frank restrictions on the Fed’s Section 13(3)
emergency lending authority, Bernanke said the Fed should still be able
to play its “lender of last resort” role effectively. Following a speech
devoted to financial stability issues, the Fed chairman was asked about
the impact of higher capital requirements on the cost of credit.

He responded that “the most important thing is the stability of the
system.”

“To that purpose we have to have higher capital,” he said,
adding that the “Basel III” international, risk-weighted capital
standards “increase capital substantially,” “make capital higher
quality” and “also raises risk weights so that effectively (banks) have
to hold more capital against a given asset.”

Those standards are “essential to financial stability,” he said.

Bernanke said “more capital is going to make bank financing more
expensive” and said that “probably will feed through and make credit a
little more expensive.”

But he said studies have shown that the net effects are “really
quite small,” while “the benefits are quite substantial.”

But recognizing that there are costs to consumers and businesses,
Bernanke said “that is a consideration. That’s one reason why we’re
phasing in” the higher capital requirements to “give banks time to
adjust” and to “give the economy time to recover.”

Bernanke said stress tests are “countercyclical” in the sense that
“to the extent there is a build-up in credit, a build-up in house prices
… a stress test that can ask banks how much capital they have if
housing prices collapse … would have the effect of (requiring banks to
raise) additional capital.”

Although Dodd-Frank restricts Fed lending to individual financial
institutions, Bernanke said the Fed can still lend to classes of firms,
as well as to such entities as clearinghouses,, and so “the basic tool
(of providing emergency liquidity) is still there.”

Asked about unintended consequences of the controversial Volcker
Rule intended to restrict banks from trading for their own account,
Bernanke said it is important to distinguish between permissible
market-making and banned proprietary trading.

He said the Fed is “going to work very hard to get an appropriate
balance between a rule that meets the statutory requirement of banning
proprietary trading but allows market making for all assets, including
debts of foreign governments.”

He acknowledged that “there is not going to be a completely level
playing field.”

** MNI **

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