THE FED: Get Bad Assets Off Bank Books, Boston Fed's Rosengren Urges

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THE FED: Get Bad Assets Off Bank Books, Boston Fed's Rosengren Urges

WASHINGTON (Dow Jones) -- A central lesson of the banking crisis in Japan a decade ago is that so-called bad assets must be quickly removed from banks' balance sheets or else management will fixate on the errors of the past to the exclusion of making new loans, the president of the Federal Reserve Bank of Boston said Monday. "I believe it would be desirable to move quickly to remove problem assets from bank balance sheets, so banks can once again focus on future prospects rather than past mistakes," Boston Fed chief Eric Rosengren told a conference of international bankers. "Banks without troubled assets focus on avoiding further losses and further depleting capital," he said. The assets should not be managed by the government, according to Rosengren. Japan's experience in the 1990s -- called the "lost decade" in which government reluctance to deal with problem institutions gave rise to what were known as "zombie banks" -- has been a subject near and dear to the hearts of U.S. policy makers recently as they seek to hit upon a solution to the nation's lending woes. The current U.S. model -- in which the Federal Deposit Insurance Corp. closes a bank, removes the bad assets and quickly disposes of the good assets -- works well, Rosengren said. Conversely, allowing weak banks to struggle on in hopes of recovery is not a good idea, he said. In some cases, weak Japanese banks supported troubled borrowers in an effort to prop up loans while at the same time they ignored more creditworthy borrowers. Troubled banks have an incentive to postpone reserving problem loans because it would further deplete capital. So allowing wounded banks to continue operating only serves to hurt prospects for recovery, he said. "The evidence from Japan and previous problems in the U.S. indicates that allowing poorly capitalized banks to continue operations with insufficient capital is likely to exacerbate problems with credit availability," Rosengren said. "This is a reason for moving to resolve, as quickly as possible, banks that are clearly insolvent," he said. Another lesson from Japan in the 1990s is that regulators must act with a soft touch because troubled banks are reluctant to make new loans or address problems with troubled assets, he said. For instance, under present rules, loan-loss reserves at banks soar after a crisis has occurred -- precisely when the economy needs bank capital to be put to use. Rosengren didn't propose a solution to this problem but said it was something that regulators should think about. Rosengren didn't address nationalization in his remarks. Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=6aW4xd4LO86%2F1a0GwmErOw%3D%3D. You can use this link on the day this article is published and the following day.