Bernake expects bank failures

Federal Reserve Chairman Ben S. Bernanke yesterday said for the first time that he expects some bank failures as a result of the spreading financial crisis, while consumers as well as banks will bear the brunt of what could be a protracted economic downturn.

Mr. Bernanke's testimony before the Senate Banking, Housing and Urban Affairs Committee provided his gloomiest assessment of the economy to date and came after the government reported that economic growth approached zero at the end of last year. While maintaining the Fed's official stance that recession can be avoided, Mr. Bernanke discussed the possibility frankly and at length with senators.

President Bush yesterday said the economy is plagued by uncertainty but is still growing after posting growth of only 0.6 percent in the fourth quarter. "The housing issue is one that we're deeply concerned about," he said, adding, "We'll make it through this period."

The advent of bank failures is one measure of how deep the downturn has become. The country has not seen widespread bank failures since the savings and loan crisis of the late 1980s, which precipitated an expensive taxpayer-financed bailout, a major credit crunch and a deep recession in 1990 and 1991.

Mr. Bernanke expressed confidence there would be no bank failures as recently as last week, so his change of tune yesterday suggests that he recently became aware of banks whose solvency is threatened by what he characterized as a widening credit "crisis."

"There probably will be some bank failures," he said, though they are likely to be among smaller regional banks that are particularly exposed to falling property markets.

Wall Street markets, which swooned on Mr. Bernanke's remarks about banks yesterday, have focused on the health of the biggest banks and investment houses, such as Citicorp, J.P. Morgan, Bank of America and Merrill Lynch, which cumulatively have reported more than $150 billion in losses. Despite their monumental troubles, Mr. Bernanke said he thinks the large banks have enough reserves and capital to avoid failure.

"I don't anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system," he said.

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