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Bernanke Defends Bank Tests as a Confidence Builder

The Federal Reserve chairman, Ben S. Bernanke, on Monday defended the rigor of the government’s stress tests of the nation’s 19 largest banks, saying that the results should bolster confidence in the banking system.

The much-anticipated results showed that 10 banks, including Bank of America, Wells Fargo and Citigroup — must raise a total of $75 billion in new capital to absorb potential losses in a worst-case recession.

The remaining nine, JPMorgan Chase and Goldman Sachs Group among them, had enough capital to withstand a deeper recession.

“We hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion,” Mr. Bernanke said at a Fed conference on financial markets at Jekyll Island, Ga.

The tests helped push prices of bank stocks higher on Friday. However, that rally fizzled Monday as bank shares dragged the market lower.

Regulators determined that four of the banks, U.S. Bancorp, Capital One Financial, BB&T and Bank of New York Mellon, were sound enough to survive a deeper recession. Those institutions announced Monday that they planned to issue stock to help repay money to the government.

Mr. Bernanke said it would take time to evaluate whether the stress test process helps to reduce the uncertainty that has hung over investors and the economy about the banks’ future losses and capital needs.

“However, the initial indications are encouraging,” he said.

Each of the 10 banks requiring more capital as a buffer against potential losses has pledged to have the additional capital by a Nov. 9 deadline, he said.

Many banks are already “well ahead” in finding private-sector options for increasing their capital base by selling shares, and several have announced plans for new stock issues, he added. Some banks have said they will issue longterm debt not guaranteed by the Federal Deposit Insurance Corporation, another positive sign, Mr. Bernanke said.

He also defended the soundness of the bank tests, saying estimates regulators used to determine how much capital was needed as a buffer were “appropriately conservative.” Some Wall Street analysts have questioned whether the tests were rigorous enough.

Fielding questions after his speech, Mr. Bernanke said he believed the dollar would regain value because the Fed was committed to keeping prices stable.

The Fed has been aggressive in cutting interest rates to a record low near zero and turning to unconventional ways to lift the country out of recession because it is trying to avoid deflation, or a prolonged drop in prices, he said.

The risk of deflation is “receding but it certainly needs not to be ignored,” he said.

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