Colin Barr

Following the money in banking, economics, and Washington

Bernanke brushes off Greek risk to banks

June 22, 2011: 3:04 PM ET

A Greek default would deliver a "very small" hit to U.S. banks, Fed chief Ben Bernanke said Thursday.

Bernanke, speaking in Washington at a Federal Reserve press conference, said the central bank has been "doing all we can to monitor the situation" in Greece, where the markets have been acting as if a default by the cash-strapped country is inevitable.

Is this glass half full?

A Greek default would be the biggest global financial shock since the fall of Lehman Brothers in 2008. A default "would no doubt roil financial markets globally," Bernanke said. "It would have a big impact on credit spreads, stock prices and so on."

But he contends that it would not hit the U.S. banks very hard. There has been some doubt in the market on this point. In part because there are doubts about how exposed U.S. banks are via credit default swaps -- the disclosure on that point is lacking, let's say -- and in part it's because regulators missed the boat so badly when the market turned in 2007.

But Bernanke said the Fed had asked banks to do stress tests on the question, including their exposure via derivatives such as CDS, and concluded that the effect on bank capital wouldn't be substantial.

U.S. bank stocks were modestly higher in afternoon trading, with Citi (C) up 2% and Bank of America (BAC) and Goldman Sachs (GS) up marginally.

Bernanke added that the Fed has been looking at the exposure of U.S. money funds, which hold a large percentage of their assets in loans of various stripes to European banks. Bernanke admitted that the indirect exposure to a Greek crisis is thus "very substantial" but sounded hopeful that the worst won't come to pass.

So everyone's retirement account may well get crushed again in a Greek default, but it won't be because the banking system here is on the verge of collapse. Thank goodness for small blessings.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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