'Foreign shocks' could harm US financial stability

US Treasury Secretary Jacob Lew warned Congress on Wednesday that foreign turmoil, such as Greece's debt crisis, could destabilize the US financial system.

"In today's globally integrated financial markets, foreign shocks have the potential to disrupt financial stability in the United States," Lew said in testimony to the House of Representatives financial services committee.

Lew cited political uncertainty in Greece that has added to concerns about stability in the 19-nation eurozone. Greece's negotiations with its creditors, the European Union and the International Monetary Fund, have bogged down as payment deadlines loom and the risks grow of a debt default and exit from the currency bloc.

"Although there has been some progress during Greece's ongoing discussions with Europe and the IMF, the negotiations and the path to securing agreement are challenging and complex," Lew told lawmakers.

"We continue to urge a timely resolution so that Greece is able to continue to meet its obligations," he said.

Lew, in a phone call on Tuesday with Greek Prime Minister Alexis Tsipras, warned Athens that a failure to reach a deal on financing would immediately create hardship for Greece and "broad uncertainties for Europe and the global economy."

Talks between Greece and the creditors over the release of 7.2 billion euros ($8.1 billion) of bailout funds to Athens have ground to a halt this week over the conditions for the funding. Greece needs the money to make a debt payment of around  1.5 billion euros to the IMF at the end of June.

Lew, presenting an annual report to Congress on the Financial Stability Oversight Council, highlighted that the current ultra-low interest rate environment was encouraging increased risk-taking that could threaten the financial system.

"Investors may seek incremental gains in yield for disproportionate amounts of risk.  Banks, credit unions, and broker-dealers have lower net interest margins, leading some firms to increase risk by holding longer-duration assets, easing lending standards, or engaging in other forms of increased risk-taking," he said.

The Council recommends close monitoring of those heightened risks "as well as the risks from potential severe interest rate shocks," he said.

Lew spoke ahead of the Federal Reserve's interest-rate announcement at 1800 GMT. The Federal Open Market Committee is expected to maintain the benchmark federal funds rate at the zero-level, where it has been pegged since the 2008 financial crisis. Many analysts expect the US central bank will launch its first rate hike in nine years in September.
Source: AFP