WASHINGTON — U.S. banks' exposure to a potential Greek default is "quite minimal," but the sovereign debt crisis hitting countries throughout Europe still pose indirect threats to U.S. financial institutions, Federal Reserve Board Chairman Ben Bernanke told lawmakers Tuesday.
Testifying before the Joint Economic Committee, Bernanke tried soothing fears about the European crisis causing a double-dip recession, and said U.S. banks have limited their exposure to debt-ridden countries such as Greece, Ireland and Portugal. U.S.-based money-market mutual funds that may have been vulnerable to those areas have already started to refocus on more stable countries like France and Germany, he added.
Still, Bernanke said, U.S.-based institutions still face headwinds from the market volatility triggered by the crisis abroad, and have "much more substantial exposure" to banking systems in other countries such as Italy and Spain.
"It isnt so much the direct exposure that concerns me. Rather as we have seen in the last few days — its been very evident — market uncertainty about the resolution of the Greek situation, about the broader resolution of sovereign debt issues and European banking issues has created an enormous amount of uncertainty and volatility in financial markets," Bernanke said. "Its through that volatility and indirect effects that were being affected now."
The Fed chairman reiterated that the central bank continues to monitor how intertwined U.S. banks are with both foreign banks and foreign sovereign debt. Meanwhile, Bernanke said his counterpart at the European Central Bank, Jean-Claude Trichet, has ample tools to provide liquidity, and the two central banks share a swap line to allow European banks to re-lend U.S. dollars provided to the ECB in exchange for euros held at the Fed.
"We are doing all we can to cooperate with the European Central Bank and other central banks to provide dollar funding for global money markets," said Bernanke.
He stressed that such swap lines do not amount to a backdoor bailout to European banks that would leave U.S. taxpayers on the hook.
"If there are any losses, they are responsible, not us," said Bernanke. "So, taxpayers are under no risk whatsoever through these swap lines."
Here in the U.S., regulators will continue to ensure adequate supervision of U.S. banks, which have substantially increased their capital base since the crisis, he said. But Bernanke added that while regulators are authorized to provide liquidity for the U.S. banking industry as a whole should the crisis worsen, the Dodd-Frank Act made it "illegal" for the Fed to bail out an individual firm that was insolvent.
"We could not do that again," Bernanke assured lawmakers. "What we could do is provide — with the permission of the Secretary of the Treasury — a broad-based lending program to try to address a run on our financial system, which we do not anticipate, but we will certainly be prepared to respond [to] if anything eventuates."
Still, lawmakers expressed concern that decisions and events in Europe would have serious impact in the U.S.
"One of the frustrations is that we dont have any control over Europe's decisions relative to their current problems and crises, but yet it can affect us here," said Rep. John Campbell, R-Calif., a member of the committee.
Bernanke explained the impact here would largely depend on the "conditions of the default" in a given foreign country. A default that was done in an orderly and controlled manner would be different than one occurring in a "disorderly, unplanned and disruptive" way, he said. If it were the latter, there would no question as to the serious impact it would have on the U.S.
"If there was a disorderly default which led to, for example, runs or defaults of other sovereigns or to stresses on European banks, it would create a huge amount of financial volatility globally that would have a very substantial impact not only on our financial system, but on our economy," said Bernanke.