Bernanke Watches for Asset Price Destabilization

NEW YORK ( TheStreet) -- Federal Reserve Chairman Ben Bernanke said Friday that the Fed is closely monitoring the asset markets for any instances of "reaching for yield" and other forms of excessive risk-taking that could destabilize asset prices at a time when interest rates are at historic lows.

"For the purpose of safeguarding financial stability, we are less concerned about whether a given asset price is justified in some average sense than in the possibility of a sharp move," said Bernanke in a speech at the 49th Annual Conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois.

Bernanke said the Fed is aiming to identify unusual patterns in valuations, such as historically high or low ratios of prices to earnings in equity markets. The Fed, the chairman said, is using a variety of models and methods for gauging default risk and risk premiums to analyze credit spreads in corporate bond markets. He added that these assessments are complemented by other information, including measures of volumes, liquidity and market functioning, as well as intelligence gleaned from market participants and outside analysts.

"Asset prices that are far from historically normal levels would seem to be more susceptible to such destabilizing moves."

Bernanke said Friday that the central bank is stepping up its monitoring of the financial system, focusing on four areas: systemically important financial institutions, shadow banking, asset markets, and the nonfinancial sector.

"The step-up in our monitoring is motivated importantly by a shift in financial regulation and supervision toward a more macroprudential, or systemic, approach, supplementing our traditional microprudential perspective focused primarily on the health of individual institutions and markets," he said in his speech.

"A fair summary is that, while the shadow banking sector is smaller today than before the crisis and some of its least stable components have either disappeared or been reformed, regulators and the private sector need to address remaining vulnerabilities," he noted.

Written by Andrea Tse in New York

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