Federal Reserve governor Susan Bies on Friday said problems in the subprime mortgage market could escalate, further unnerving investors, as shares in troubled lender New Century Financial continued to plummet.

At a risk management forum in Charlotte, North Carolina, Ms Bies said lenders were likely to see an increase in defaults involving borrowers who took out mortgages with low “teaser” interest rates, which jump to higher levels during the life of the loan.