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U.S. banks hold enough reserve capital to weather financial-market turmoil, and the central bank's interest-rate cuts will promote economic growth, Federal Reserve Governor Randall Kroszner said.

“Although the U.S. banking system will continue to face a challenging environment, it remains in sound overall condition, having entered the period of recent financial turmoil with solid capital and strong earnings,'' Kroszner said today in a speech in Miami.

Kroszner, 45, said the Fed's interest-rate reductions since September “will help to promote growth over time'' and diminish economic risks, echoing comments by Chairman Ben S. Bernanke this week. In a sign the economy may be in a recession, the U.S. lost jobs in March for a third consecutive month and the unemployment rate rose, according to a Labor Department report today.

Bernanke told lawmakers yesterday the central bank is “ready to respond to whatever situation evolves,'' and cited “considerable stress'' in markets.

The Fed has already lowered the target rate for overnight loans between banks by 3 percentage points since September, with a reduction of 2 percentage points since January, including the two biggest cuts since the Fed started using the federal funds rate as its main policy tool around 1990. The rate is now 2.25 percent.

The rate cuts, “together with the steps we have taken to foster market liquidity, will help to promote growth over time and to mitigate the risks to economic activity,'' Kroszner said in remarks to the Inter-American Development Bank's annual board meeting.

Odds in April

Futures prices indicate traders see a 36 percent chance the Fed will cut the federal funds rate by a half-point, to 1.75 percent, at the central bank's April 29-30 meeting. That's up from 12 percent odds two days ago, futures prices show.

Banks and securities firms worldwide have reported about $232 billion in credit losses and writedowns since the beginning of 2007, primarily because of U.S. subprime-mortgage defaults, according to Bloomberg data.

The Fed, averting bankruptcy at Bear Stearns Cos., agreed last month to finance $30 billion of the company's illiquid assets, including mortgage-backed securities, in a takeover of the firm by JPMorgan Chase & Co. Kroszner didn't mention the companies in his speech text.

The central bank said yesterday its emergency cash loans to securities firms climbed 16 percent to $38.1 billion over the past week, and direct lending to commercial banks through the Fed's discount window rose $6.46 billion in the week ending yesterday to a daily average of $7.01 billion pay day loans.

Helping For Now

“To date, these liquidity measures seem to have been helpful, as funding pressures on some financial institutions appear to have eased somewhat and as liquidity seems to have improved in several financial markets,'' Kroszner said.

The Fed governor urged executives at financial institutions to take a “very active and involved role in risk management.''

“In some cases, it appears that managers were not fully aware of the extent to which the risks of the different activities undertaken by the firm could, first, become correlated in times of stress and, second, result in high concentrations of risk exposures,'' Kroszner said, referring to the recent market turmoil.

Latin America

Kroszner devoted most of his speech to Latin America, saying the financial turbulence has been “evident'' in the region though “not as strongly'' as in the U.S. and Europe. Still, policy makers shouldn't “feel complacent,'' he said.

Bernanke told the Joint Economic Committee of Congress April 2 that declining home prices are “at the core'' of the credit crunch. Falling employment, rising energy costs, and depreciating housing wealth are also undercutting consumer spending.

The S&P/Case-Shiller home-price index, measuring changes in 20 U.S. metropolitan areas, dropped a record 10.7 percent from January 2007. Consumers also fell behind on car, credit-card and home-equity loans at the highest level in 15 years in the fourth quarter, according to a quarterly survey by the American Bankers Association.

Kroszner, a former economics professor who joined the Fed two years ago, is serving past the Jan. 31 expiration of his term. While President George W. Bush nominated him for a full 14-year term, Senate Banking Committee Chairman Christopher Dodd has declined to schedule a vote on Kroszner's nomination and has criticized his influence on Fed mortgage rules.

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