Federal authorities do not see any advantage to nationalizing large banks since a return to profitability can be achieved through a combination of strong regulations of how rescue funds are used, and greater transparency on financial institutions, according Fed Chairman Ben Bernanke.
During his semi-annual testimony to the U.S. Banking Committee on Tuesday, Bernanke said the U.S. economy cannot recover without a stabilization of the financial system, pointing to the failure of Franklin D. Roosevelt's New Deal, which failed to stabilize the financial system.
In addition to the previously announced public-private sector partnership between government and large financial institutions and an expansion of the Term Asset-Backed Securities Loan Facility (TALF), Bernanke said regulators are going to conduct a series of "stress testing" over a two-year period to determine which firms need to bolster capital requirements.
The government would then issue preferred shares to the firm, which would be converted into common shares until losses from the stress test actually occur, Bernanke explained.
Bernanke also said the U.S. government does not plan on taking majority stakes in financial institutions and therefore would not technically own them.
In an interview on the CBS Early Show on Tuesday, FDIC Chairperson Sheila Bair alluded to stress testing the financial system to determine the capital needs of institutions.
She also said the creation of a so-called "aggregator bank" is in the works for the near future but warned that a quick fix is not possible given the current conditions in the United States.
The Treasury's plan contains all the components of previous financial recoveries and, if properly administered, could help stabilize the financial system, Bernanke said.
He also said the Fed is both prepared and willing to keep the option of buying longer term U.S. Treasuries open as a means of stimulating the financial system if necessary.
In the meantime, the Fed is broadening existing facilities to promote credit markets, and the expansion of the TALF will come "soon", he added.
By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2009