Obama aide says several US banks need more capital

SOME US banks “undoubtably” will need more capital in coming months and the administration expects they will be able to raise it in private markets, according to a spokesman for President Barack Obama.

“The administration doesn’t believe we need to go to Congress right now” to seek more money to rescue banks, White House press secretary Robert Gibbs said. For those institutions needing more capital, “everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control”.

The Federal Reserve plans to release results of so-called stress tests on May 7th. The review is intended to assess whether banks will be able to absorb losses if the recession worsens. At least six of the 19 biggest US banks under review would require additional capital if the economy gets worse, people briefed on the preliminary results said last week. Banks were given preliminary results from the stress tests last week, and have been discussing the findings this week with regulators.

The steps taken by individual banks “will be determined not by us but by them”, Gibbs said.

Separately, a Federal Reserve official said that the US recession was fading and growth will resume later this year, which means the Federal Reserve must not wait too long before tightening monetary policy.

“While overall activity is still contracting, it now appears as if the pace of contraction is diminishing, and at some point later this year, activity will bottom out and begin expanding again,” Richmond Federal Reserve president Jeffrey Lacker said in a speech.

Lacker, a voting member of the Fed’s policy-setting committee this year, said stable price expectations should keep the risks of deflation at bay. But the Fed should not take risks with inflation by waiting too long to tighten policy.

He said the central bank has delivered “an extraordinary, unprecedented monetary expansion” after slicing interest rates almost to zero and adding over $1 trillion to its balance sheet to bolster credit markets.

“The challenge for us on the Federal Open Market Committee will be be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation.

“The danger is that we will not shrink our balance sheet and tighten policy soon enough ... I believe it will be very important to avoid the risks of waiting too long or moving too slowly,” he said.

But Lacker, regarded as one of the Fed’s most hawkish policy-makers for dissenting in favour of tighter policy in the past, did not sound too worried about inflation and stressed expectations were well anchored close to 2 per cent.

US stocks extended gains yesterday, driving the benchmark SP 500 back above the psychologically important 900 level for the first time since early January. The index has now gained more than 33 per cent since hitting a 12-year closing low on March 9th.

– (Bloomberg)