NY Fed May Demand Reports From Europe Banks
By Meera Louis - Oct 2, 2011
The Federal Reserve Bank of New York may ask foreign lenders for more detailed daily reports on liquidity as the U.S. steps up monitoring of risks from Europe's sovereign debt crisis, according to two people with knowledge of the matter.
Regulators held informal talks with some of the largest European lenders about producing a "fourth-generation daily liquidity" or 4G report, according to the people, who asked for anonymity because communications with central bankers are confidential. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps, said one person. The U.S. has already increased the number of examiners embedded in these banks, the person said.
Concern is growing that European lenders may falter as Greece teeters on the brink of default. U.S. Treasury Secretary Timothy F. Geithnerhas warned that failure to bolster European backstops would threaten "cascading default, bank runs and catastrophic risk" for the global economy.
"The Fed is trying to understand what the pressure points are in terms of liquidity and potential risks that are imposed by foreign banks to domestic institutions in our financial system," said Kevin Petrasic, an attorney at the Washington- based law firm of Paul, Hastings, Janofsky & Walker LLC. "There is a little bit more sense of urgency as a result of what's going on in Europe."
Liquidity Risk
U.S.-based money funds, which buy short-term commercial paper, have been shunning securities issued by some banks based on the continent, and European Central Bank Governing Council member Yves Mersch said Sept. 28 that liquidity shortages pose the main risks to the region's banking system.
Jack Gutt, a spokesman for the Federal Reserve Bank of New York, declined to comment. The largest European bank holding companies by assets in the U.S. include units of Deutsche Bank AG (DBK), HSBC Holdings Plc. (HSBA) and Banco Bilbao Vizcaya Argentaria S.A., according to Fed data. Duncan King, a spokesman for Frankfurt- based Deutsche Bank, Thaddeus Herrick, a spokesman for Spain- based BBVA and London-based HSBC's Rob Sherman said they couldn't comment.
U.S. banks are starting to provide a 4G report and they are being phased in this month, said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc. Some Europeans are asking U.S. counterparts for information on how to prepare the report even though there has been no formal request from the Fed so far, one of the people said.
Avoiding a Squeeze
"The report requires rapid and in some cases daily data on a banks' assets, liabilities and potential claims to measure the degree to which the bank could be caught in the classic borrow- short, lend-long squeeze," Petrou said. "The 4G is one of the tools to reveal liquidity risk."
The forms aren't public, according to Petrou, and the New York Fed declined to provide a copy.
Euro-zone banks and other institutions were more than $350 billion in debt to the Fed's emergency-lending facilities at one point during the2008-2009 financial crisis, according to data compiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.'s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.
Swap Contracts
Regulators lack access to data on foreign institutions operating in the U.S. that would allow them to "make informed judgments about the adequacy of such firms' capital and liquidity buffers," William C. Dudley, president of the Federal Reserve Bank of New York, said in a Sept. 23 Washington speech.
U.S. prime money-market funds cut their exposure to euro- zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data. The funds are rationing their credit to European banks because of concerns that financial institutions will take large losses if a euro- zone nation defaults.
Credit-default swaps allow bondholders to buy protection against losses if an issuer doesn't pay its debts. The contracts can entitle the holder to face value if the borrower defaults. Lawmakers and regulators have blamed misuse of swaps and lack of disclosure for helping to trigger the 2008 financial crisis.
A currency swap is a contract in which one party borrows one currency from another, and simultaneously lends another to the second party. Foreign-exchange swaps are used to raise foreign currencies for financial institutions and their customers, such as exporters and importers as well as investors.
Currencies and their related derivatives are among the most actively traded markets in the world, with average daily turnover reaching $4 trillion as of September 2010, Bank for International Settlements estimates.
To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net
To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; Rick Green at rgreen18@bloomberg.net
http://www.bloomberg.com/news/2011-10-02/new-york-fed-may-demand-europe-s-banks-produce-more-details-on-liquidity.html
Federal Reserve Chairman Ben Bernanke appeared Sunday evening on CBS’s “60 Minutes” to discuss the state of the economy, the central bank’s controversial $600 billion bond-buying plan and the financial crisis. Following are excerpts from the interview with CBS’s Scott Pelley, as released by the network:
Q: The major banks are racking up profits in the billions. Wall Street bonuses are climbing back up to where they were. And yet, lending to small businesses actually declined in the third quarter. Why is that?
A: A lot of small businesses are not seeking credit, because, you know, because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property has gone down. But some also can’t meet the terms and conditions that banks are setting.
Q: Is this a case of banks that were eager to take risks that ruin the economy being now unwilling to take risks to support the recovery?
A: We want them to take risks, but not excessive risks. we want to go for a happy medium. And I think banks are back in the business of lending. But they have not yet come back to the level of confidence that –or overconfidence –that they had prior to the crisis. We want to have an appropriate balance.
Q: What did you see that caused you to pull the trigger on the $600 billion, at this point?
A: It has to do with two aspects. the first is unemployment The other concern I should mention is that inflation is very, very low, which you think is a good thing and normally is a good thing. But we’re getting awfully close to the range where prices would actually start falling.
Q: Falling prices lead to falling wages. It lets the steam out of the economy. And you start spiraling downward. … How great a danger is that now?
A: I would say, at this point, because the Fed is acting, I would say the risk is pretty low. But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.
Q: Some people think the $600 billion is a terrible idea.
A: Well. I know some people think that but what they are doing is they’re looking at some of the risks and uncertainties with doing this policy action but what I think they’re not doing is looking at the risk of not acting.
Q: Many people believe that could be highly inflationary. That it’s a dangerous thing to try
A: Well, this fear of inflation, I think is way overstated. we’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re going to do.
Q: Is keeping inflation in check less of a priority for the Federal Reserve now?
A: No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.
Q: Can you act quickly enough to prevent inflation from getting out of control?
A: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
Q: You have what degree of confidence in your ability to control this?
A: One hundred percent.
Q: Do you anticipate a scenario in which you would commit to more than 600 billion?
A: Oh, it’s certainly possible. And again, it depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks.
Q: How would you rate the likelihood of dipping into recession again?
A: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.
Q: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.
A: It may not be. It’s very close to the border. — it takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.
Q: [On calls to cut the deficit]
A: We need to play close attention to the fact that we are recovering now. We don’t want to take actions this year that will affect this year’s spending and this year’s taxes in a way that will hurt the recovery. That’s important. But that doesn’t stop us from thinking now about the long term structural budget deficit. We’re looking at ten, 15, 20 years from now, a situation where almost the entire federal budget will be spent on Medicare, Medicaid, Social Security, and interest on the debt. There won’t be any money left for the military or for any other services the government provides. We can only address those issues if we think about them now.
Q: How concerned are you about the calls that you’re beginning to hear on Capitol Hill that would curb the Fed’s independence?
A: Well, the Fed’s independence is critical. The central bank needs to be able to make policy without short term political concerns. In order to do what’s best for the economy. We do all of our analysis, we do all of our policy decisions based on what we think the economy needs. Not based on when the election is or what political conditions are.
Q: Is there anything that you wish you’d done differently over these last two and a half years or so?
A: Well, I wish I’d been omniscient and seen the crisis coming, the way you asked me about, I didn’t, But it was a very, very difficult situation. And– the Federal Reserve responded very aggressively, very proactively
Q: How did the Fed miss the looming financial crisis?
A: there were large portions of the financial system that were not adequately covered by the regulatory oversight. So, for example, AIG was not overseen by the Fed. … The insurance company that required the bailout, was not overseen by the Fed. It didn’t really have any real oversight at that time. Neither did Lehman Brothers the company that failed Now, I’m not saying the Fed should not have seen some of these things. One of things that I most regret is that we weren’t strong enough in in putting in consumer protections to try to cut down on the subprime lending problem. That was an area where I think we could have done more.
Q: The gap between rich and poor in this country has never been greater. In fact, we have the biggest income disparity gap of any industrialized country in the world. And I wonder where you think that’s taking America.
A: Well, it’s a very bad development. It’s creating two societies. And it’s based very much, I think, on– on educational differences The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is five percent. If you’re a high school graduate, it’s ten percent or more. It’s a very big difference. It leads to an unequal society and a society– which doesn’t have the cohesion that– that we’d like to see.
Q: We have talked about how the next several years are going be tough years in this country. But I wonder what you think about the ten year time horizon. Fifteen years. How do things look to you long term?
A: Long term, I have a lot of confidence in the United States. We have an excellent record in terms of innovation. We have great universities that are involved in technological change and progress. We have an entrepreneurial culture, much more than almost any other country. So, I think that in the longer term the United States will retain its leading position in the world. But again, we gotta get there. And we have some very difficult challenges over the next few years.
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