Government should re-regulate financial system: FBR

(Reuters) - The U.S. government should re-regulate the financial sector, focusing more on assets and the funding of the assets, and infuse pure common equity capital into the banking system, Friedman Billings Ramsey analyst Paul Miller said.

The new framework should focus less on individual institutions, and regulate liabilities and liquidity risks as well as the assets in which a company invests, he said.

"When capital markets have clarity on a company's funding source, appropriate counterparty risks are applied. When balance sheet exposures are opaque, leverage and counterparty risks are elevated to unsustainable levels," he said.

Recent government actions to solve the financial crisis do not address the large capital shortfall in the system, which must be fixed in order to improve the availability of credit, he said.

Miller said while infusing equity capital, both managements and the government must stop concerning themselves with diluting current shareholders.

Once the government begins to make the capital infusions and stabilize the large financial institutions, then private capital can be raised to support the system further, Miller said.

"The longer the government waits, the more dilutive the capital injections will be to common shareholders," he wrote in a note to clients.

(Reporting by Amiteshwar Singh in Bangalore; Editing by Vinu Pilakkott)