Bernanke plays down effect of US sub-prime mortgage crisis

America's sub-prime mortgage crisis will not harm the broader US economy, the Federal Reserve chairman Ben Bernanke confidently predicted yesterday.

In his most explicit comments on the collapse of the sub-prime market to date, Mr Bernanke said that, although tighter lending standards would limit the ailing housing market's recovery, the wider impact would be small.

"We believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited, and we do not expect significant spillovers to the rest of the economy or to the financial system," the Federal Reserve chief told a conference in Chicago.

The sub-prime market, which specialises in lending to borrowers with poor credit records, collapsed earlier this year in the wake of falling house prices and spiralling mortgage arrears. New Century, America's second biggest player, went bust, and the crisis was blamed as one of the main factors behind the turmoil in financial markets that took place at the end of February and the beginning of March.

Mr Bernanke said the cooling of the housing market had been "an important source" of slowdown in the US economy, which has experienced growth of only 1.3 per cent over the past year.

And he said housing market weakness had persisted longer than expected. "Although a levelling off of sales late last year suggested some stabilisation of housing demand, the latest readings indicate a further step down in the first quarter," he said. "Curbs on [sub-prime] lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters."

He added that the Federal Reserve was looking into whether it should have more power to prohibit specific lending practices in an attempt to avoid a repeat of the sub-prime debacle.

Mr Bernankealso voiced concerns about the private equity boom. "There are some significant risks associated with the financing of private equity, including bridging loans. We are looking at that," he said.

Credit rating agency Standard and Poor's recently warned that "signs of stress" were emerging in the UK's sub-prime market. The industry has been rocked by news that Kensington, which pioneered the market in the 1990s, has ousted its chief executive and issued a long-term profits warning.