Treasury's Brainard: vital banks hold more capital

WASHINGTON (Reuters) - Treasury Undersecretary Lael Brainard on Tuesday said the recent financial crisis underlines the necessity for banks worldwide to hold more capital to ensure they can weather downturns.

"The lesson is clear: more and higher quality capital must be at the core of our efforts to ensure a more resilient financial system less prone to failure," Brainard said in prepared testimony to a U.S. Senate Banking subcommittee.

Brainard, Treasury's under secretary for international affairs, said that it will also be a challenge to make sure that other nations enact financial reforms comparable to those embodied in the Dodd-Frank bill recently approved by Congress.

"We must develop the most globally convergent financial protections the world has ever attempted," she said. "It is critical to level the playing field -- while protecting against future financial crises and promoting economic growth."

Brainard said European bank stress tests, which are under way and are to be made public on Friday, should help create confidence as was the case when U.S. authorities stress-tested U.S. banks.

"While there is no one-size-fits-all approach to stress testing, this European effort, with the appropriate assumptions and disclosures, could play a helpful role in dispelling uncertainty about the financial condition of individual financial institutions in Europe...," she said.

In order to constrain risk-taking within the financial system, Brainard said governments must have authority to act if necessary under a common framework of supervision and regulation.

"All firms, products, and institutions that could pose significant risks to the system should be regulated -- thereby extending the perimeter of regulation," she said. That should also include stronger oversight of hedge funds and it will be vital to make sure that "international consistency" is applied in doing so.

Brainard said she would like to see other countries follow the same approach the U.S. has taken, in requiring advisers to hedge funds above a certain threshold in size register and report appropriate information to regulators.

(Reporting by Glenn Somerville; Editing by Theodore d'Afflisio)