Fed's Kohn: Banks Still At Risk, Housing Market Not Yet Bottomed

Washington, D.C. (AHN) - Federal Reserve Vice Chairman Donald Kohn warned that the U.S. banks are likely to writedown more assets and show weak earnings in the coming quarters over bad loans.

Kohn was testifying before the Senate Banking Committee during a hearing on the state of the banking industry on Thursday.

"We expect bank holding companies to continue to report weak earnings and further asset valuation write-downs and/or significant credit costs in coming quarters," Kohn said in a statement.

He added that the banking industry will require to raise more capital and may need to cut their dividends to improve their balance sheet and to help insulate themselves from the current economic and credit turmoil.

The slowdown in the U.S. economy is going to affect loan portfolios, which will continue to deteriorate, as consumer spending remain low and the job market is still weak.

Federal Deposit Insurance Corporation said in a quarterly report last week that it has reserved around $37.1 billion in loan-loss provisions during the first quarter of 2008, which is up from the $9.2 billion set aside in the first quarter of 2007.

Over all the subprime mortgage crisis has forced the major banks and brokerages to post more than $386 billion in losses and writedowns, since last summer.

Around 50 financial institutions have lost $9 billion in the fourth quarter of 2007, while around $10 billion were lost during the first quarter of this year.

"As economic conditions have softened, these large companies have reported increasing problems in mortgage loan portfolios, particularly home equity lines of credit and loans to residential real-estate developers," Kohn said in the statement.

So far the financial services companies have managed to raise as much as $283 billion to cover the losses, according to data compiled by Bloomberg.

However, he admitted that at present there are stronger set of investment banks compared to the banks a month and a half ago as they have learned to protect themselves against downside risks.