Euro contagion still a risk to US banks, Bernanke says

US financial institutions’ exposure to Europe is still creating risk of contagion from the debt crisis, the chairman of the Federal Reserve says.

Ben Bernanke
Ben Bernanke

Speaking before the US House of Representatives, Ben Bernanke highlighted the measures taken by the central bank and US institutions to reduce the risks of their European exposure, but warned that an exacerbation of the eurozone debt crisis could have significant consequences for the US.

Bernanke noted that the Federal Reserve and five major central banks including the Bank of England and the European Central Bank last year extended the dollar swap line to boost confidence, while US financial institutions have bought protection against sales of credit default swaps linked to European sovereign debt.

However, the chairman admitted that such measures are unable to fully insulate the US from the events playing out in the eurozone.

“Were the situation in Europe to take a severe turn for the worse, the US financial sector likely would have to contend not only with problems stemming from its direct European exposures, but also with an array of broader market movements, including declines in global equity prices, increased credit costs, and reduced availability of funding,” he warns.

Bernanke ended his testimony by calling on European policymakers to “follow through on their policy commitments to ensure a lasting stabilisation” but welcomed the recent alleviation in financial stresses in the eurozone.