On the issue of risky home mortgages, Bernanke pointed out that the Fed has issued some guidance for lenders and he underscored the importance of borrowers making sure they understand how interest-only and other non-traditional mortgages work.
"We're not saying you shouldn't make these loans. What we're saying is that they be done the right way," Bernanke told the banking conference. Borrowers and lenders holding exotic mortgages could get clobbered if housing prices drop or interest rates rise sharply.
In his speech, Bernanke said federal banking regulators will press ahead on a sweeping plan aimed at improving risk management for the country's largest and most internationally active banks. Hhhhhmmmm......
The proposal, years in the making, dubbed Basel II, would instruct such banks to use complex new risk formulas to determine capital requirements. The thrust of the proposal is to promote stability of the U.S. financial system and make big banks better able to withstand any financial problems that might erupt in the global marketplace.
"No immediate crisis requires us to move toward Basel II, but the gradual evolution of market practice and the emergence of very large and increasingly complex banking organizations operating on a global scale require that we make significant changes in the way we assess capital adequacy at these organizations," Bernanke said at the conference organized by the Federal Reserve Bank of Chicago.
"Indeed, waiting for a crisis to force change would be foolish; by moving forward now [2006 mind you], we have the luxury of being deliberate in the development and introduction of a system that promises significant benefits," Bernanke added. [Emphasis added]
Full Story link http://www.usatoday.com/money/economy/housing/2006-05-18-bernanke-housing_x.htm
Contributing: Associated Press Writer Michael Tarm in Chicago.
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