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Fed's Kroszner Blasts Banks Over Subprime Crisis

In scathing criticism of their failure to understand the risks of the subprime market, a Federal Reserve policymaker on Tuesday lambasted top bankers and called for much more prudence in lending.

AP

"In particular cases, senior management was not fully aware of the firm's latent concentrations to U.S. subprime mortgages," Fed Board Governor Randall Kroszner said in prepared remarks to the American Bankers Association. A text of his speech was made available Io the media prior to delivery.

"They did not realize that in addition to the subprime mortgages on their books, they had exposure to off-balance sheet vehicles holding mortgages, through claims on counterparties exposed to subprime," he said. Kroszner did not touch directly on the outlook for the U.S. economy in his prepared remarks.

Kroszner did not touch directly on the outlook for the U.S. economy in his prepared remarks.

The subprime crisis has chilled U.S. growth and sparked a global credit crunch as the sector's woes spilled out across the capital markets, hitting financing conditions widely.

Kroszner said that he had invited participants in the credit card market to a forum that will be hosted by the Fed on April 8 to review current conditions in that market.

Banks have suffered billions of dollars of losses from the collapse of the U.S. subprime mortgage market and Kroszner said the lesson was that some of them needed to go back to basics.

"The current financial turbulence underscores the importance of getting the fundamentals of sound risk management right," he said.

The losses forced some of the biggest U.S. banks to go to tap foreign investors for fresh capital and Kroszner acknowledged that the turmoil had hit the sector hard.

"Liquidity problems always have the potential to affect bank balance sheets and, in doing so, bank capital," he said.

"In a few cases, these unexpected increases in balance sheet created some pressure on capital ratios, even if the level of capital remained stable."

Getting the tone right at the top of an institution was a crucial step toward creating a more risk-aware firm, as well as designing bonus structures that don't encourage excess.

"Provide incentives for business-line leaders to assume only the risks that the firm can absorb because they penalize those who try to take on excessive risk...in the name of maximizing short-term profit," he said.

Banks