Speaking at the Chicago Fed's Conference on Bank Structure and Competition, Fed Chairman Ben Bernanke said he would strongly urge firms to continue raising new capital.
"Recent events have also demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets," Bernanke said. "I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital from diverse sources."
"I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve," he added.
He also urged firms to prepare ahead of time for any unexpected rapid deterioration of capital and to improve its risk management practices and transparency.
Bernanke also noted that firms should not put too much weight on rating agencies, adding that larger firms have not depended on such organizations.
To address these issues, Bernanke said the Fed was considering reviewing its guidance on risk management with the focus on firms exhibiting loose risk practices.
In the Q&A that followed, Bernanke said that sovereign wealth funds (SWF) had been a positive source of financing to the markets as it provided leveraged, patient funds which is required for dealing with the current crisis. He also said it was important for the U.S. markets to remain open to foreign direct investment.
Bernanke also noted the tight credit conditions putting pressure on bank lending provided great opportunities for small, well-capitalized community banks. He also pointed out that community banks have access to the same kind of loans from the Fed as larger institutions.
Bernanke explained that the Fed was paying attention to the rating of bond insurers even though they were not getting involved in the discussions. He added that he hoped the institutions would manage to keep their AAA ratings.
By Erik Kevin Franco and edited by Nancy Girgis