STONE MOUNTAIN, Ga. - Federal Reserve Chairman Ben Bernanke conceded Monday evening that higher bank capital requirements may make loans more expensive, but contended the costs outweigh the benefits.

Bernanke, answering questions following a dinner address to the Atlanta Federal Reserve Bank's annual financial markets conference, said he found "interesting" other nation's use of "countercyclical" tools designed to adjust credit availability during varying economic and financial conditions. But he stopped well short of saying that U.S. regulations governing mortgage underwriting should be relaxed to boost the housing market.

He said the Fed's capital "stress tests" are a kind of countercyclical tool in a sense.

Despite Dodd-Frank restrictions on the Fed's Section 13(3) emergency lending authority, Bernanke said the Fed should still be able to play its "lender of last resort" role effectively. Following a speech devoted to financial stability issues, the Fed chairman was asked about the impact of higher capital requirements on the cost of credit.

He responded that "the most important thing is the stability of the system."

"To that purpose we have to have higher capital," he said, adding that the "Basel III" international, risk-weighted capital standards "increase capital substantially," "make capital higher quality" and "also raises risk weights so that effectively (banks) have to hold more capital against a given asset."

Those standards are "essential to financial stability," he said.

Bernanke said "more capital is going to make bank financing more expensive" and said that "probably will feed through and make credit a little more expensive."

But he said studies have shown that the net effects are "really quite small," while "the benefits are quite substantial."

But recognizing that there are costs to consumers and businesses, Bernanke said "that is a consideration. That's one reason why we're phasing in" the higher capital requirements to "give banks time to adjust" and to "give the economy time to recover."

Bernanke said stress tests are "countercyclical" in the sense that "to the extent there is a build-up in credit, a build-up in house prices ... a stress test that can ask banks how much capital they have if housing prices collapse ... would have the effect of (requiring banks to raise) additional capital."

Although Dodd-Frank restricts Fed lending to individual financial institutions, Bernanke said the Fed can still lend to classes of firms, as well as to such entities as clearinghouses,, and so "the basic tool (of providing emergency liquidity) is still there."

Asked about unintended consequences of the controversial Volcker Rule intended to restrict banks from trading for their own account, Bernanke said it is important to distinguish between permissible market-making and banned proprietary trading.

He said the Fed is "going to work very hard to get an appropriate balance between a rule that meets the statutory requirement of banning proprietary trading but allows market making for all assets, including debts of foreign governments."

He acknowledged that "there is not going to be a completely level playing field."

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