Tags: Fed | cut | Bank | Capital

Fed: S&P Cut Won't Affect US Bank Capital

Saturday, 06 Aug 2011 11:14 AM

Standard & Poor’s decision to cut the U.S. credit rating won’t affect the capital positions of the nation’s banks, regulators said yesterday.

Banks, which hold Treasurys as a form of capital, won’t need to build larger cushions to protect against possible losses from soured loans, a group of banking regulators, including the Fed and the Federal Deposit Insurance Corp., said in a statement in Washington.

“For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government- sponsored enterprises will not change,” the regulators said.

One of the missions of the Fed is to ensure the safety and soundness of the U.S. banking system. During the 2008 financial crisis, the Fed required the biggest banks to undergo “stress tests” and ordered some of them, including Citigroup Inc. and Bank of America Corp., to enlarge their capital buffers.

Emergency Fed lending to banks and the central bank’s purchases and sales of government securities, carried out to influence borrowing costs in the economy, also won’t be affected, a central bank official said.

The Fed provides emergency loans secured by collateral through the so-called discount window when other sources of funding aren’t available.

Lending through the discount window surged to a high of $110 billion a day during the height of the financial crisis in the fall of 2008 following the collapse of Lehman Brothers Holdings Inc. At the time, banks turned to the Fed as a lender of last resort because their sources of credit were frozen.

Fed lending through the discount window was down to $10 million for the week ending Aug. 3.

Interest Rates

The Fed official also said that S&P’s decision would have no implications on its ability to influence interest rates through open-market operations. The Fed in June completed a $600 billon Treasury bond-purchase program aimed at bolstering the economy.

Fed Chairman Ben S. Bernanke said last month that the central bank could buy more Treasury securities if the economy appeared in danger of stalling.

Bond purchases and other steps for the Fed to stimulate the economy are likely to be discussed at the Fed’s Aug. 9 meeting, said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics.

“The credit downgrade will have little impact on the Fed’s deliberations,” she said. “They will be more driven by jobs and the recent weakening in the economy.”

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