Saturday, 1 March 2008

Some small US banks are likely to fail as a result of the housing crisis, Ben -Bernanke said yesterday, warning that his country faced a more difficult situation than in the aftermath of the dotcom bust in 2001."There will probably be some bank failures," the Fed chairman told the Senate banking committee in his second day of biannual testimony to Congress.He said the banks at risk were "small and in many cases de novo [new] banks that are heavily invested in real estate in localities where prices have fallen".But he said: "I do not anticipate any serious problems" at any of the big banks, which played the most important role in the US financial system.The Standard & Poor's financials index declined 3 per cent yesterday.Mr Bernanke, meanwhile, dodged efforts by senators to enlist his support for proposals to reform the bankruptcy code or use taxpayers' money to intervene directly in the mortgage market.He said it was worth "thinking about" additional steps but could not recommend any at this point, beyond existing proposals to modernise the Federal Housing Administration and reform Fannie Mae and Freddie Mac.
The Fed chairman said there were "some similarities with the 2001 experience" - in so far as this downturn, like the previous one, was being driven by a sharp fall in asset prices.But he said there were "important differences". The fall in house prices was creating a "much broader set of issues" than the slump in tech stocks did.
Falling house prices affected more consumers than falling stock prices, while the house prices had also caused a "sustained disruption in the credit market".
Moreover, the US was in a weaker position to respond to the negative growth shock today than it was in 2001.



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