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US regulators look for signs of credit crisis spreading

They are keeping a keen eye on credit card, home equity and building loans

WASHINGTON – UNITED States regulators are watching credit card and commercial construction loans for signs that they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the sub- prime mortgage market, stayed atop the list of concerns. But regulators and Federal Reserve officials expressed concerns on Tuesday that credit risks may extend beyond mortgages.

Fed chairman Ben Bernanke said on Tuesday that credit-weary banks may be better off accepting lower home loan principal amounts rather than the bigger losses that would come from foreclosures.

He warned that mortgage delinquencies and foreclosures would likely rise as house prices fall further.

Mr Bernanke’s second-in- command, Mr Donald Kohn, said at a Senate Banking Committee hearing on the same day that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

‘Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing home owner distress.

‘And they are paying particular attention to the securitisation market for credit card loans,’ he said. Mr Kohn added that commercial real estate is ‘another area that requires close supervisory attention’.

He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of last year and ‘could be a harbinger of increasing delinquency rates on other consumer loans’.

Despite those strains, Mr Kohn said the banking sector remained sound and he saw no threat to banks’ viability.

The credit mess that began with failing US sub- prime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending standards. That has slowed the flow of cash to firms and consumers who power the US economy.

US Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans.

‘Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration,’ he said.

‘We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks’ balance sheets,’ he added.

But in a sign of how the Fed is conflicted in combating the competing threats of slowing growth and rising prices, another Fed official stressed that inflation was his top concern. ‘Containing inflation is the purpose of the ship I crew for,’ said Dallas Federal Reserve president Richard Fisher.

‘If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,’ he said.

Source: REUTERS (The Straits Times 6 Mar 08)

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