Bernanke says Fed acted in face of 'market stress'
The Federal Reserve acted to cut rates and add liquidity to the financial system in recent weeks in the face of significant market stress.
By Agencies |
WASHINGTON: The Federal Reserve acted to cut rates and add liquidity to the financial system in recent weeks in the face of "significant market stress," chairman Ben Bernanke said on Thursday.
Bernanke, in remarks prepared for delivery to Congress, said the economy and markets reacted to surpisingly large losses in the area of subprime mortgages that "have far exceeded even the most pessimistic estimates."
Appearing in the House Committee on Financial Services, Bernanke said the worst of the mortgage maelstrom is not yet over, as more homeowners face difficulties making payments on adjustable rate mortgages (ARMs).
"With house prices still soft and many borrowers of recent-vintage subprime ARMs still facing their first interest-rate resets, delinquencies and foreclosure initiations in this class of mortgages are likely to rise further," he said.
Bernanke said about 15 percent of ARMs to subprime lenders with weak credit were in delinquency or foreclosure in July, and that about 320,000 foreclosures were initiated in each of the first two quarter sof the year, up from a previous average of 225,000.
"It is difficult to be precise about the number of foreclosure initiations ... Historically, about half of homeowners who get a foreclosure notice are ultimately displaced from their homes, but that ratio may turn out to be higher in coming quarters because the proportion of subprime borrowers, who have weaker financial conditions than prime borrowers, is higher."
Bernanke spoke two days after the Fed cut its base federal funds rate by half a point to 4.75 per cent "to help forestall some of the adverse effects on the broader economy that might arise from the disruptions in financial markets."
The Fed also cut its discount rate for direct loans from the central bank by 50 basis points, after reducing the rate by the same magnitude in August in an effort to ease access to credit for lenders amid tighter conditions.
He said that the wide losses prompted a retrenchment by lenders, affecting the broader financial system.
"In this episode, the shift in risk attitudes combined with greater credit risk and uncertainty about how to value those risks has created significant market stress," he said.
"On the positive side of the ledger, past efforts to strengthen capital positions and financial market infrastructure places the global financial system in a relatively strong position to work through this process."
Bernanke told the committee that the fragmented nature of the mortgage industry had made regulation difficult. He said "markets tend to self-correct" and that reassessments now going on in the industry would likely prevent similar lax lending problems recurring in the future.
Bernanke, in remarks prepared for delivery to Congress, said the economy and markets reacted to surpisingly large losses in the area of subprime mortgages that "have far exceeded even the most pessimistic estimates."
Appearing in the House Committee on Financial Services, Bernanke said the worst of the mortgage maelstrom is not yet over, as more homeowners face difficulties making payments on adjustable rate mortgages (ARMs).
"With house prices still soft and many borrowers of recent-vintage subprime ARMs still facing their first interest-rate resets, delinquencies and foreclosure initiations in this class of mortgages are likely to rise further," he said.
Bernanke said about 15 percent of ARMs to subprime lenders with weak credit were in delinquency or foreclosure in July, and that about 320,000 foreclosures were initiated in each of the first two quarter sof the year, up from a previous average of 225,000.
"It is difficult to be precise about the number of foreclosure initiations ... Historically, about half of homeowners who get a foreclosure notice are ultimately displaced from their homes, but that ratio may turn out to be higher in coming quarters because the proportion of subprime borrowers, who have weaker financial conditions than prime borrowers, is higher."
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Bernanke spoke two days after the Fed cut its base federal funds rate by half a point to 4.75 per cent "to help forestall some of the adverse effects on the broader economy that might arise from the disruptions in financial markets."
The Fed also cut its discount rate for direct loans from the central bank by 50 basis points, after reducing the rate by the same magnitude in August in an effort to ease access to credit for lenders amid tighter conditions.
He said that the wide losses prompted a retrenchment by lenders, affecting the broader financial system.
"In this episode, the shift in risk attitudes combined with greater credit risk and uncertainty about how to value those risks has created significant market stress," he said.
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"On the positive side of the ledger, past efforts to strengthen capital positions and financial market infrastructure places the global financial system in a relatively strong position to work through this process."
Bernanke told the committee that the fragmented nature of the mortgage industry had made regulation difficult. He said "markets tend to self-correct" and that reassessments now going on in the industry would likely prevent similar lax lending problems recurring in the future.
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