LYNDHURST, New Jersey (Reuters) – The U.S. Federal Reserve is keeping an eye on European banks struggling with the continent's debt crisis because of the turbulence in financial markets, one of the central bank's most influential policymakers said on Friday.
William Dudley, the president of the Federal Reserve Bank of New York, was responding to report this week in the Wall Street Journal that the bank is taking a closer look at the U.S. units of Europe's biggest banks, out of concern that a euro zone debt crisis could spill into the U.S. banking system.
"We're looking at our banks, European banks basically because of the turbulence that we've seen in the financial markets," Dudley told a gathering of New Jersey business leaders, adding that doing so was "normal, standard operating procedure" for the central bank.
"The reality is we monitor European banks and U.S. banks every day, so there's nothing to be particularly alarmed about that," Dudley said. "It's prudent for us to make sure that we understand what's going on."
Dudley said the "good news" is that banks are in a stronger position than they were several years ago.
"Capital levels are much higher, the quality of capital is much better, credit quality at the banks is improving, and the banks have huge liquidity buffers compared to what they had in 2008," he said.
"There is some stress in the system right now ... But we're in much, much better shape than we were back several years ago," he said.
(Reporting by Edith Honan)
COLUMBUS, Ohio (Reuters) – The economy is growing so slowly that it will take years to wrench lofty unemployment rates back to normal levels, Cleveland Federal Reserve Bank President Sandra Pianalto said on Friday.
Speaking to a community bankers' group, she said growth in 2011 was likely to be about two percent and forecast it will rise only to three percent in 2012 and 2013 -- unlikely to make much of a dent in the current 9.1 percent jobless rate.
"If we're going to dig ourselves out of the hole that we're in and begin to drive down the unemployment rate, we need even faster growth than that," she said in Columbus, Ohio.
"I think it will take quite a few years for the unemployment rate to fall to more typical levels, in the neighborhood of 5-1/2 percent," she added.
Pianalto noted that central bank policymakers, in deciding to keep official interest rates near zero until mid-2013 at their last policy session, had concluded that recovery will be slower than expected in coming quarters and that downside risks were on the rise.
Not only are incomes growing slowly in a harsh job climate, but consumer confidence is weak and other key economic sectors are in trouble.
"The housing sector remains very depressed," Pianalto said. "Home prices are still under pressure, inventories of existing homes are still very high, and foreclosures continue to be a serious national problem."
On a more positive note, Pianalto said that she thought a spike in food and energy prices this year will abate.
"I see the inflation rate stepping down from its current level over the rest of this year and into next year as well," she said, likely to an average of two percent "or a bit less" in 2012 and 2013.
( Reporting by Neil Stempleman and Glenn Somerville; Editing by W Simon )
LONDON (Reuters) – Soaring costs for borrowing dollars to fund the daily business of Europe's banks is hitting their shares and feeding worries that the continent's spiraling debt crisis could trigger the next funding crisis for lenders.
Though staying a long way below their 2008 levels when Lehman Brothers collapsed, key indicators such as interbank borrowing rates for dollar funds and the cost of swapping euro interest payments into dollars are on the rise.
The collapse of Lehman sparked a total breakdown in lending markets -- not just in Europe -- which is now a far more remote prospect, traders and analysts said.
But if a repeat of this situation remains unlikely -- especially as euro zone banks under pressure can access funding through the European Central Bank if needed -- the trend is going the wrong way, and could quickly worsen.
"If we see some more, it's going to cause alarm bells," said Philip Tyson, a strategist at MF Global.
The worst-hit UK banks in the stock market -- Barclays (BARC.L), Lloyds (LLOY.L) and Royal Bank of Scotland (RBS.L) -- were also among those showing some of the biggest spikes in the cost for short-term dollar funds.
The three-month dollar interbank borrowing rate for Barclays and RBS on Friday was among the highest of those used in the daily LIBOR fixing, reaching 34 basis points, up roughly a third from the middle of July.
U.S. banks still found it a lot cheaper to borrow unsecured dollars, with the likes of Citi (C.N) and JPMorgan (JPM.N) quoting the three month rate at 26 basis points.
And the three-month euro/dollar cross-currency basis swap -- which shows the rate charged when swapping euro interest payments on an underlying asset into dollars -- declined steadily throughout the week.
That is also a sign that dollar funds are becoming more expensive. At a negative 91 basis points on Friday, it was close to its lowest level since late 2008, though well shy of a minus 305 bp trough hit that year.
Such fears have battered bank stocks, which fell to their lowest in more than two years on Friday. Most now trade at big discounts to their book value, but markets foresee more pain and still won't pick them up as bargains.
One unidentified euro-zone bank borrowed $500 million in one-week money from the ECB, in the first instance that the central bank's facility was tapped since February, further sparking worries in the market.
For now, funding markets are not panicking. But the ECB's weekly numbers will be closely watched.
"You're going to have to see more signs of banking stress and that some of these facilities are being tapped to see a more marked pickup in the way the (Libor/OIS) spreads are pushing out," Tyson at MF Global said.
(Editing by Douwe Miedema and Will Waterman)