LARGE US investment banks will be able to access emergency cash from the Federal Reserve into next year as long as turmoil persists in financial markets, Fed chief Ben Bernanke said yesterday.
Mr Bernanke's statement is a sign of the growing concern among US policymakers that market volatility will continue for some time.
The signal from Mr Bernanke is likely to soothe Wall Street, in that it confirms Fed support for investment banks through the credit crisis. In afternoon trading the SP 500 was up 0.5 per cent.
However, as well as signalling fears that the effects of market turmoil may be felt for longer than hoped, a move to extend the credit facility will raise pressure on Congress to tighten regulation of investment banks.
Speaking in Virginia at a forum on mortgage lending for low-income households, Mr Bernanke said: "We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current and exigent circumstances continue to prevail in dealer-funding markets."
In March, the Fed granted investment banks such as Lehman Brothers and Merrill Lynch access to emergency cash for at least six months in an effort to stabilise the US financial system on the same day it helped rescue Bear Stearns with a $29 billion loan.
Previously, access to emergency funding was only allowed for commercial banks such as Citigroup and JPMorgan.
Although the moves helped stabilise credit markets for several months, worries about mortgage debt and the health of financial institutions have flared up again.
This week, concerns about Fannie Mae and Freddie Mac, the government-sponsored mortgage companies, took centre stage after their shares each tumbled more than 16 per cent on Monday. More evidence of the depth of the US housing crisis came when a measure of pending home sales fell at an unexpectedly steep rate of 4.7 per cent in May.
Mr Bernanke's comments came as Congress was preparing to examine what changes to financial regulation needed to be made in response to the credit squeeze.
The House financial services committee will today hold its first hearing on the topic, with testimony expected from Mr Bernanke and US Treasury secretary Hank Paulson.
Mr Bernanke said Congress "may wish to consider" whether new tools were needed to liquidate a "systemically important" investment bank on the verge of bankruptcy, as with Bear Stearns.
The Fed chairman said that one option was a structure allowing regulators to set up a "bridge bank" to liquidate a firm along the same lines used for commercial banks. - ( Financial Timesservice)
