Bankers advising the Federal Reserve Board warned in February of potential harm to U.S. financial institutions from rising credit risk even as they endorsed the central bank’s record stimulus.
“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said on Feb. 8, following a Federal Open Market Committee meeting on Jan. 29-30.
“Believing the economy to be improving but still vulnerable, and recognizing the high quality of the Federal Reserve’s information-gathering and analytical resources,” the panel “continues to support the FOMC’s current accommodative monetary policy,” the Federal Advisory Council said.
The minutes of the council’s quarterly meetings, obtained by Bloomberg News in a Freedom of Information Act request, trace how the 12 bankers’ views evolved from opposition to the Fed’s announcement of a third round of bond buying in September to support for central-bank efforts in February to boost an economic expansion beset by a “drag” from fiscal tightening.
Policy makers are debating how long to press on with unprecedented accommodation, including $85 billion in monthly bond buying aimed at spurring economic growth and reducing 7.5 percent unemployment.
The Fed’s advisory council in February saw “exceptional strength” in the balance sheets of both borrowers and financial institutions, leaving room for “considerable potential for credit expansion as headwinds subside,” according to the minutes.
The declining interest-rate spreads in some consumer finance categories “suggest that monetary actions are being transmitted more directly to the economy,” the minutes said.
Still, several bankers warned Fed officials in February that “uncertainty over health-care costs, tax policy, and the mounting U.S. debt” were among the reasons commercial and industrial loan growth remained “tepid” and credit lines were “chronically undrawn,” according to the minutes.
The panel said in February that farmland valuations posed an asset-price bubble caused by unusually low interest rates, echoing concerns expressed by Kansas City Fed President Esther George. The bankers also called on the Fed to coordinate efforts by financial institutions and government agencies to reduce the “significant systemic risk” to U.S. finance from the threat of cyber-attacks.
The panel of bankers is appointed by regional Fed banks and dates to the founding of the central bank in 1913. Bloomberg obtained minutes from the quarterly meetings from May 2011 until February.
Members of the council include Joseph Hooley, chairman and chief executive officer of State Street Corp. in Boston; James Gorman, chairman and CEO of Morgan Stanley in New York; Kelly King, chairman and CEO of BB&T Corp. in Winston-Salem, North Carolina; and D. Bryan Jordan, chairman and CEO of First Horizon National Corp. in Memphis, according to the Fed’s website.
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