By Pedro Nicolaci da Costa
WASHINGTON (Reuters) - Europe's financial crisis poses a threat to U.S. banks and the economy but it is up to the continent's leaders -- not the Federal Reserve -- to find a resolution, a top official at the central bank said on Friday.
New York Federal Reserve Bank President William Dudley defended the Fed's decision to lower the cost of dollar funds for overseas banks stressed by Europe's debt crisis as an important step to safeguard the U.S. economy, but he told lawmakers no further intervention was planned.
"I don't anticipate, even if the crisis in Europe were to worsen, further steps on the part of the Federal Reserve at this time," Dudley, a former Goldman Sachs partner, told a U.S. House of Representatives subcommittee.
Both Dudley and senior U.S. Treasury official Mark Sobel told the panel the euro zone's festering debt crisis posed a big risk to the U.S. economy, and that the United States had an interest in seeing it put to rest.
Financial markets remain on edge about Europe's ability to put a floor under a bond market selloff that is pushing borrowing costs for countries such as Italy and Spain toward unsustainable levels.
Dudley said U.S. financial institutions were in good shape to withstand any blows from Europe and had little direct exposure to the European countries hardest-hit by the crisis.
However, he warned that their vulnerability was greater when countries such as France and Germany, as well as the European banking system, were taken into account.
"This means that if the crisis were to broaden further and intensify, this could put greater pressure on U.S. banks' capital and liquidity buffers," potentially choking off credit for U.S. households and businesses, Dudley said.
When pressed, Dudley said he could not rule out the possibility that the U.S. central bank might be willing to accept European debt as collateral for emergency loans to U.S. banks.
"I wouldn't necessarily rule it out, if the collateral is good collateral and is appropriately haircutted," he said, referring to the discount that borrowers must accept on collateral for emergency loans.
NO MORE MONEY FOR IMF
Sobel, the U.S. Treasury's deputy assistant secretary for international affairs, said Europe's debt crisis had deepened as he made a pitch for continued U.S. involvement through the International Monetary Fund.
Some Republican lawmakers have pushed to rescind a $100 billion U.S. credit line for the IMF approved in 2009, warning that U.S. taxpayer money could be put at risk. Democrats, however, have been successful in beating back that proposal.
While the IMF can play a role in easing the crisis, it "cannot substitute for a strong and credible European firewall and response," Sobel said.
He told lawmakers that President Barack Obama and Treasury Secretary Timothy Geithner were "actively engaged" with European counterparts to help them deal with the crisis, but made clear Washington had no intention of pumping more money into the IMF.
In late November, the Fed collaborated with other central banks to prevent a global credit crunch stemming from the turmoil in Europe by lowering the cost of existing dollar swap lines. The arrangements permit the Fed to provide dollars to the European Central Bank and four other central banks in exchange for local currencies.
Like the funds for the IMF, the swap facilities have drawn criticism from U.S. lawmakers who say they could hand U.S. taxpayers the bill for a European financial bailout.
Steven Kamin, the head of the Fed's international finance division, tried to address those concerns in his testimony to the panel, arguing the swaps were safe for the Fed and U.S. taxpayers, and had already had a beneficial effect on dollar funding markets.
(Additional reporting by David Lawder, Glenn Somerville, David Clarke and Susan Cornwell; Editing by Tim Ahmann and James Dalgleish)