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U.S. banks with capital at risk in Europe can survive a worsening economic outlook there, and even a recession at home, Fed Chairman Ben Bernanke said on Capitol Hill on Wednesday.
“We considered a very severe scenario in our stress test, including a sharper slowdown in the U.S. and a deep recession in Europe and we found that all the banks would be able to meet required capital…even in these events,” Bernanke told Congress. He also said that the U.S. does not have any more AIG’s in the mix, in reference to the insurer that gambled on credit default swaps and required a government bailout.
Both Bernanke and Treasury Secretary Timothy Geithner faced Congress defending the government’s support of Europe, and asking questions regarding the impacts of the EU debt crisis on the U.S. economy. Bernanke said that the U.S. taxpayer was not at risk through bailout funds made available by the International Monetary Fund, of which the U.S. is a member. Both said that the European continent was “rich enough” to take care of its own problems and that the IMF should not over-extend itself in trying to save Europe from massive public deficits.
“The European situation remains very difficult,” Bernanke said. “We are encouraging them to strengthen their firewalls and fiscal compacts.”
The Fed Chairman also noted that the U.S. does not have a lot of capital at risk in Europe with regards to bailouts. “We are not taking on credit risk. The European Central Bank takes on the risk,” he said.
Many have called on Europe to form a fiscal union instead of just a monetary union. Such a move would ultimately unify EU members government accounts, so each country has similar fiscal rules to follow in order to be members of the EU.
Geithner said that the crisis in Europe is due in part to fiscal differences, but also because the government grew “at unsustainable levels”, especially in the south.
source: forbes.com
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