Bernanke Urges `Hunkering' Banks to Raise Capital (Update4)

By Steve Matthews and Scott Lanman


May 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke pushed banks to keep raising capital in the aftermath of losses from the credit crisis to avert deeper damage to the U.S. economy.

``Firms are hunkering down,'' Bernanke said at a conference in Chicago today. ``They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.''

Bernanke's remarks reflect concerns he and other Fed officials expressed this week that financial markets have yet to return to normal. The Fed chief also said the central bank is considering strengthening its guidance to banks on how they manage risk after ``weaknesses'' that contributed to the crisis.

While banks and securities companies have raised about $244 billion of capital since July, they may have further to go after writedowns and credit losses in excess of $333 billion. Bernanke and Treasury Secretary Henry Paulson have repeatedly said firms should keep increasing their funds, seeking to alleviate the impact of the credit crunch.

Citigroup Inc. and JPMorgan Chase & Co. are among companies raising capital this quarter. IndyMac Bancorp Inc., the second- biggest independent U.S. home lender, said this week it may raise a ``slug'' of money from outside investors.

`Proactive' Efforts

``I strongly urge financial institutions to remain proactive in their capital-raising efforts,'' Bernanke said in the text of his speech. ``Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.''

The Fed said in a weekly report today that its direct lending to banks rose to a record $14.4 billion in the week to May 14. Policy makers have increased the attractiveness of the resource by lowering the rate on the funds and extending the term.

Bernanke said that senior bank executives need to take a leadership role in strengthening risk management. The strongest banks didn't rely on credit-rating companies and took into account the danger of a slump in access to funds, he said.

``I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital,'' Bernanke said at the Chicago Fed conference on credit markets.

Rate Outlook

Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee next meets June 24-25. Investors anticipate the central bank's next move will be to raise, rather than lower, the benchmark rate from 2 percent, according to futures prices.

Bernanke said the credit crisis continues to confound the economy. ``Events continue to unfold,'' he said, adding that ``the financial stress we continue to experience'' stemmed from a separation of lending and distribution of credit to investors.

Sovereign wealth funds have contributed as much as a third of the capital banks have raised, which has been ``very positive,'' Bernanke said in response to questions. ``It has been very constructive to have this source of funding coming into our banking system,'' he said.

Banks are likely to heed the chairman's advice, said David Resler, chief economist at Nomura Securities International in New York.

`Wood to Cut'

Bernanke is ``just reminding us there's more wood to cut here,'' he said. ``They're going to continue to float new debt or equity into a market that's going to be a little more receptive to it because they see this as part of a process that's putting the problems behind them.''

The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. That has increased the threat to economic growth already posed by the worst housing recession in a quarter century.

``Bernanke and the Fed have a systemic interest in growth and getting credit moving again,'' said Joe Belew, president of the Consumer Bankers Association in Arlington, Virginia, whose members include Citigroup and Wachovia Corp. ``That is all important. But underwriting has tightened and will remain tight until we work our way through existing portfolios.''

The Fed has created three new types of loans to financial companies since December to alleviate credit strains, including direct lending to firms other than commercial banks for the first time since the Great Depression.

Bernanke said the Fed was also conducting a review of how supervisors approach bank examinations.

``Supervisors must redouble their efforts to help organizations improve their risk-management practices,'' Bernanke said.