Former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis has yet to end even as borrowing costs tumble, warning that US banks must raise “large” amounts of money.

Greenspan’s comments suggest he sees a bigger capital shortfall in the banking system than reflected in regulators’ stress tests on the 19 biggest US lenders. Treasury Secretary Timothy Geithner told lawmakers on Wednesday that banks have issued more than US$56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion.

A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief, who left the central bank in 2006, said that the continued slump in home prices is putting at risk millions of borrowers.

“We’re on the edge and if this thing doesn’t get resolved quickly I’m worried,” he said.

Home prices will only start to stabilize once the “liquidation” rate of single-family homes has peaked, he said. “I don’t think we’re there yet.”

Source: Bloomberg