WASHINGTON — Federal Reserve Chairman Ben Bernanke said Wednesday federal officials already have the tools on hand to prop up banks that need additional capital and again pushed back against fears of nationalization.
"There's not any need to do any radical change, rather we can use the tools we have to make sure that those banks are behaving in a way that's both good for business in terms of long-term viability but while also supporting the economy in terms of lending going forward," Bernanke told the House Financial Services Committee.
In response to questions, he noted that the goal of the Obama administration's revamped financial rescue plan is to ascertain whether the nation's largest 19 or 20 banks have a sufficient amount of high-quality capital to meet the needs of their customers, even under a weaker economic scenario.
Banks found to need additional capital will have six months to raise private capital, and if they can't, the government will step in and purchase convertible preferred shares in those firms. Additionally, those shares could be converted to common shares to keep the banks well capitalized, he noted.
Responding to a question about Citigroup's current woes, Bernanke said, "We will see how their test works out and we'll see what evolves."
Nationalization misses the point, he said.
Asked if Citigroup could end up being nationalized, Bernanke said he doesn't see that happening.
"It may be the case that the government will have a substantial minority share in Citi or other banks, but again we have the tools ... to make sure that we get the good results we want in terms of improved performance" without the negative effects of a bankruptcy process or seizure, which would be disruptive to the markets, Bernanke said.
He added he defines nationalization as the government taking over 100% of a firm and zeroing out stock.
"Nationalization to my mind is when the government seizes the bank, zeroes out the shareholders, and begins to manage and run the bank," Bernanke said.
"I don't think we want to do that," he said. "I don't think we need to do that."
Asked why the Obama administration is now planning to inject capital into banks through mandatory convertible preferred shares that can be turned into common equity shares, Bernanke responding by saying it's needed.
"We need that to strengthen the banking system" so they can make loans to support the economy, he said. He added that while the government initially purchased senior preferred shares in banks, "the preferred equity shares have reached their limit in usefulness."
Meanwhile, Bernanke added that many smaller banks are in good condition. Many are well capitalized and healthy, he said.
Echoing some of the cautiously upbeat remarks he made Tuesday that helped trigger a big jump in equity markets, the Fed chairman said "we're on the right track" in tackling the financial crisis.
Bernanke also said certain credit markets are already seeing benefits from the Fed's Term Asset-Backed Securities Loan Facility, or TALF, before the central bank even makes its first loan under the program.
In anticipation of the TALF, which Bernanke said will be in operation "very soon" without giving a specific date, asset-backed securities backed by credit cards, automobile loans and student loans have already seen improvement, he said during Wednesday's hearing.
Part of the reason TALF hasn't already been started is that officials wanted to be sure they had taken all the necessary legal and procedural steps, according to Bernanke. "We are absolutely committed to making sure we meet all the requirements that will protect the taxpayers," he said.
Some loans that are refinanced and then securitized will be eligible for the TALF, Bernanke said.
He also said the global market for U.S. government debt remains strong given the status of Treasury securities as a safe investment.
However, the U.S. can't keep running trillion dollar budget deficits as far as the eye can see, Bernanke said.
