European Concerns Dominate Senate Banking Hearing

The Senate Committee on Banking, Housing and Current Affairs heard testimony from three experts on the state of the financial situation in Europe on Thursday, and sought answers to additional questions as members explored how the U.S. might be exposed to the eurozone debt crisis.

The hearing, titled “Examining the European Debt Crisis and its Implications,” brought testimony from Lael Brainard, undersecretary for international affairs at the Treasury Department; Robert Hormats, undersecretary for economic, energy and agricultural affairs at the State Department; and Steven Kamin, director of the division of international finance at the Federal Reserve.

Brainard testified that there are three main risks to the U.S. from the ongoing debt crisis: direct exposure of the financial system, extensive trade linkages with Europe and broader financial market volatility. Hormats agreed with her assessment, and Kamin pointed out that the main line of defense against those risks is the actions being taken by European policymakers.

in response to a question from Sen. Richard Shelby, R-Ala., on the state of capitalization of European banks, Kamin pointed out the recent action by the European Central Bank in extending three-year loans to European banks. While pointing out that offering liquidity is not the same as recapitalizing, he also said that the loans alleviated funding pressures on European banks and that the banks were also taking steps themselves to recapitalize. When pressed by Shelby for an evaluation of U.S. bank exposure to the crisis, Kamin said he did not have the information and would have to consult with colleagues.

Brainard pointed out that because of its position as the largest shareholder in the International Monetary Fund, the U.S. was able to influence policies and reforms in countries like Greece, Portugal, and Ireland. She added that such countries needed to address matters of competitiveness and slow growth.