US Bank Regulators Wary Of Next Set Of Credit Woes

Source : The Straits Times, March 5, 2008

WASHINGTON - UNITED States regulators said they are watching credit cards and commercial construction loans for signs they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the subprime mortgage market, remained atop the list of concerns. But banking regulators and Federal Reserve officials on Tuesday expressed concerns that credit risks may extend beyond mortgages.

Federal Reserve Chairman Ben Bernanke said credit-weary banks may be better off accepting lower home loan principal amounts rather than the bigger losses that would come from foreclosures. He warned that mortgage delinquencies and foreclosures would likely rise as house prices fall further.

'This situation calls for a vigorous response,' Mr Bernanke said in a speech to the Independent Community Bankers of America in Orlando, Florida, referring to government and private-sector initiatives to slow the rate of home loan failures.

'Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy,' he said.

US stocks fell while prices of safe-haven US government bonds rose and the long-suffering dollar traded around an all-time low against a basket of currencies as investors braced for more bank losses. The financial sector was among the weakest, down 2.1 per cent in mid-afternoon trading.

Mr Bernanke's second-in-command, Mr Donald Kohn, said at a Senate Banking Committee hearing that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

'Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing homeowner distress, and are paying particular attention to the securitisation market for credit card loans,' he said.

Mr Kohn added that commercial real estate is 'another area that requires close supervisory attention'. He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of 2007 and 'could be a harbinger of increasing delinquency rates on other consumer loans'. Despite those strains, Mr Kohn said the financial sector remained sound and he saw no threat to banks' viability.

Risks to fed forecast
The credit mess that began with failing US subprime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending standards. That has slowed the flow of cash to companies and consumers who power the US economy.

US Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans.

Mr Dugan's office regulates about 1,700 of the largest banks.

'Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration,' Mr Dugan said.

'We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks' balance sheets,' he said.

In a separate speech at an economics conference, Fed Governor Frederic Mishkin said he was concerned that the US economy could deteriorate even more than the sluggish pace that the Fed has forecast for this year.

In addition to the housing troubles and subsequent credit tightening, he raised concerns about a weakening labour market and rising inflation, along with evidence of slower spending by consumers and businesses.

'I see significant downside risks to this outlook. These risks have been brought into particularly sharp relief by recent readings from a number of household and business surveys that have had a distinctly downbeat cast,' Mr Mishkin said.

In a sign of how the Fed is conflicted in combating the competing threats of slowing growth and rising prices, another Fed official stressed that inflation was his top concern.

'Containing inflation is the purpose of the ship I crew for,' Dallas Federal Reserve President Richard Fisher said in remarks to a conference in London.

'If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,' he told the Society of Business Economists. -- REUTERS