Bernanke urges banks to overhaul pay, risk policies

US banks need to overhaul policies ranging from employee compensation to risk management, Federal Reserve Chairman Ben S Bernanke said before regulators release results of the stress tests on the nation’s largest lenders.

“The crisis revealed serious deficiencies on the part of some financial institutions” in risk-taking, capital adequacy and liquidity planning, Bernanke said on Thursday in a Chicago speech. “The crisis has likewise underscored the need for heightened vigilance and forcefulness on the part of supervisors.”

The stress tests have been “comprehensive, rigorous, forward-looking, and highly collaborative among the supervisory agencies,” Bernanke said in a speech transmitted by satellite to the Chicago Fed’s annual conference on bank structure and competition. The tests may help improve supervision in the future, he added, while not commenting on the results.

The central bank’s tests show that Bank of America Corp, Wells Fargo & Co and Citigroup Inc require a total of about $54 billion to weather a worsening of the recession, people familiar with the conclusions said.

The Fed chief warned in congressional testimony on May 5 that another shock to the financial system would undercut the central bank’s forecast that the US recession will give way this year to a slow recovery.

Bernanke said on Thursday the crisis should prompt a review of compensation to ensure that bonuses aren’t rewarding risk-taking that may hurt companies over the long term.

“Bonuses and other compensation should provide incentives for employees at all levels to behave in ways that promote the long-run health of the institution,” he said. “Certainly, an important lesson of the crisis is that the structure of compensation and its effect on incentives for risk-taking is a safety-and-soundness issue.”

Most US banks expect loan delinquencies and losses to increase this year, a Fed report showed this week. More than a net 70 percent of respondents said bad loans will rise should the economy progress “in line with consensus forecasts,” the Fed said in a quarterly survey of banks’ senior loan officers. More firms made it tougher for consumers to get home and credit- card loans in the past three months.

Banks and financial institutions have reported more than $1.3 trillion in credit losses and writedowns worldwide since the crisis began. Many of those losses stemmed from mortgage- related investments that declined with the collapse in the housing market.

The central bank’s tests show that Goldman Sachs Group Inc, JPMorgan Chase & Co and Bank of New York Mellon Corp have enough capital to help prop up flows of credit to businesses and consumers facing the worst recession in five decades.