The financial crisis in Europe poses significant risks to the U.S. financial system and economy, and the Federal Reserve remains prepared to take action as needed to protect the U.S. in the event that financial stresses escalate, Fed Chairman Ben Bernanke testified before the congressional Joint Economic Committee.

Bernanke said that the crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence and pressuring U.S. financial markets and institutions. European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area and lay the foundations for long-term economic growth, he added.

Regarding banking and financial conditions in the United States, Bernanke said they have improved significantly since the depths of the crisis. Notably, recent stress tests conducted by the Federal Reserve of the balance sheets of the 19 largest U.S. bank holding companies showed that those firms have added about $300 billion to their capital since 2009. The tests also showed that, even in an extremely adverse hypothetical economic scenario, most of those firms would remain able to provide credit to U.S. households and businesses. Lending terms and standards have generally become less restrictive in recent quarters, although some borrowers, such as small businesses and potential homebuyers with less-than-perfect credit, still report difficulties in obtaining loans.

To read Bernanke’s full testimony, click here.