U.S. bank regulators are studying whether the European sovereign debt crisis could have spillover effects on the U.S. financial system, a top Federal Reserve official said Monday.
While U.S. financial firms appear well positioned to absorb broad shocks from a European debt default, it is harder to estimate the after-effects, said Patrick Parkinson, the head of the Federal Reserve's division of supervision and regulation.
Direct exposure of U.S. banking firms to peripheral Europe is not large. A deeper worry is that a default by a European economy could have a much broader impact on financial markets and the global economy, Parkinson said.
"We've been taking a good long hard look at this," Parkinson said at a conference sponsored by the Pew Charitable Trusts and New York University. "Where things can go awry is when in fact we have contagion effects that spread."
The risk of a Greek debt default and the possibility investors could lose confidence in other heavily indebted European economies has raised the specter of a fresh financial crisis. Greek politicians are debating deficit-reducing steps aimed at stabilizing the country's economy and persuading international lenders to release urgently needed aid funds.
Parkinson's comments echoed those of Fed Chairman Ben Bernanke, who said last week a disorderly default of a European economy would be likely to roil global financial markets.
A European default would likely lead to a widening of credit spreads in Europe and globally, Parkinson said. It would similarly be expected to have an adverse impact on stock prices in Europe and, to a lesser extent, globally, he added.
While regulators who have stress-tested U.S. financial firms believe most of them are pretty well prepared to deal with a broad shock, risks from spillover effects bear watching, he said.
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