MercoPress. South Atlantic News Agency

Bernanke urges banks to continue capital-raising efforts

United States Federal Reserve chairman Ben Bernanke urged financial institutions to remain proactive in their capital-raising efforts as market and economic conditions improve but he also called for better risk management amid “ongoing fragility” in the markets.

In a speech at the Chicago Fed's Annual Conference on Bank Structure and Competition, the central banker said the improvement in risk management as a result of the credit crunch would help institutions overcome the credit crunch and create a more-stable financial system by making firms more resilient to shocks. "I strongly urge financial institutions to remain proactive in their capital-raising efforts," Bernanke said adding he was "encouraged" by recent capital raising activity. "Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve". He said he has been encouraged at the success of many banks in raising new capital and praised foreign-owned sovereign wealth funds for the positive role they were playing as suppliers of badly needed capital. "They have generally provided unleveraged, patient money, which is what is needed here. They have not asked for extensive control or management of the firms," Bernanke said. "So I think it has been very constructive to have had this source of funding coming into our banking systems." The Fed chief said the turmoil in credit markets has underscored some important principals for risk management, reminding institutions of the importance of proper risk identification, robust valuation methods, proper preparation for liquidity disruptions and strong oversight by senior managers. "With renewed attention to these principles and the restoration of strong incentives for sound risk management, institutions should be able to overcome the difficulties we have seen in the recent application of the originate-to-distribute model and begin to use it successfully again Bernanke said regulators were pushing for better disclosure by banks to increase transparency and to bring greater market discipline on them. He said lax risk management at financial firms had contributed to credit turmoil. He added that in hindsight, it was evident "problems occurred at each step of the credit-extension chain" and had contributed to the credit crisis that the economy encountered.