A day after the Senate approved sweeping new authority for the dismantling of influential failing firms, Federal Reserve Chairman Ben Bernanke said the Central Bank has already adopted a “systemic approach” to oversight.
That new regulatory method was derived from experience that helped steer the biggest players of the banking system out of the worst period during the financial crisis, the Fed chairman said.
“We are incorporating key lessons from the financial crisis and the stress assessment into our day-to-day supervisory processes. To avoid another destructive financial crisis, we must learn all that we can from the crisis just endured,” Bernanke said in prepared remarks for the Federal Reserve Bank of Chicago’ Annual Conference on Bank Structure and Competition.
Bernanke said the financial crisis taught Fed supervisors to adopt “systemically-oriented approach” that focuses both on risks at individual institutions and risks to the “stability of the financial system as a whole.”
Bernanke spoke a year after the Fed completed the Supervisory Capital Assessment Program, or SCAP, more commonly known as the bank stress test.
It was a coordinated, comprehensive test by regulators of the U.S. banking system that focused on all 19 domestic bank holding companies with at least $100 billion.
“By helping to restore confidence in the banking system, the program was an important step toward quelling the crisis,” Bernanke said. “Beyond that, however, our experience during the stress assessments also contributed to the development of tools and approaches that will inform our supervisory process as we work to reduce the likelihood of future financial crises.”
For each banking organization included in the SCAP, supervisors estimated potential losses for each major category of assets, and revenue expectations, under a “worse-than-expected macroeconomic scenario for 2009 and 2010,” Bernanke said.
Those assessments found that if the economy was hit with a “more adverse” scenario, losses at the 19 firms during 2009 and 2010 could total about $600 billion.
After taking account of potential resources to absorb those losses and capital that had already been raised or was contractually committed, the Fed determined that 10 of the 19 institutions would collectively need to raise an additional $75 billion in common equity. Firms were asked to raise the capital within six months, by November 2009.
Bernanke said the Fed is now working with banks to ensure improvement of risk measurement and management, while strengthening levels of capital.
But with credit demand tepid and the economy still on a moderate recovery pace, Bernanke said the Fed has not applied stress test on a wider level to smaller banks.
“We have not attempted a full-scale simultaneous stress test of these banks, but instead have worked with them on an individual basis to evaluate their capital needs,” Bernanke said.
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