Regulator says Basel capital rules still tight

WASHINGTON Thu Jul 29, 2010 2:56pm EDT

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WASHINGTON (Reuters) - International bank capital proposals were scaled back this week, but the extent of the easing has been overblown, the regulator of the largest U.S. banks said on Thursday.

Comptroller of the Currency John Dugan said the definition of what qualifies as quality capital is still very restrictive -- even more so than what U.S. bank regulators used when they stress-tested 19 banks last year under adverse conditions.

"I think it's been a little misreported how much they scaled things back. It's actually a very tight definition of common equity and would be a significant change from the past," Dugan told Reuters in an interview about the work of the Basel Committee released this week.

Dugan, who is leaving his post on August 14 near the end of his five-year term, also commented on regulators' actions during the depths of the financial crisis in 2008.

He said one of the smartest moves was to switch the bailout to capital injections instead of buying up banks' toxic assets. He said the latter procedure could have led to the nationalization of some banks.

"I think that would have been a nightmare," said Dugan, chatting from his modern office in downtown Washington with a view of the Capitol landscape, the morning after his send-off party.

The Office of the Comptroller of the Currency is one of multiple federal bank regulators, and is the top cop of the depository units of the largest banks, including Citigroup and JPMorgan Chase & Co.

ON THE RIGHT TRACK

Regarding capital, Dugan said the Basel Committee of global banking supervisors is making great progress toward drafting new rules.

The committee this week announced changes to its draft of new standards, saying it would scale back many of its proposals to beef up bank capital and liquidity rules.

Banks have lobbied aggressively to soften the rules that could cut sizably into their profits, as regulators try to ensure that banks go into the next downturn with better capital cushions.

The Institute of International Finance, which represents more than 400 of the world's biggest banks, said last month that Basel III could lop 3 percent off economic growth over the next five years in the United States, euro zone and Japan and cost almost 10 million jobs.

The work on so-called Basel III rules will be a complement to the Dodd-Frank Act, a 2,300-page rewrite of regulation for the U.S. financial system that was signed into law last week.

Some critics of the bill say it did not go far enough to prescribe that banks must have more and better capital, and that capital requirements can effectively restrain risky activity by making it expensive.

However, regulators generally do not want specific capital rules written into law, preferring to keep them flexible.

Dugan said the Basel process has been on the right track, and it is natural for international regulators to compromise as they move closer to finalizing the proposals, which are due at the end of this year.

But in between now and then, the committee still has some big tasks.

"I think the two significant decisions that they have not yet reached is how much capital to raise ... and they didn't say how long the phase-in period would be," Dugan said.

'WOULD HAVE BEEN DISASTROUS'

Looking back to his role in trying to manage the fallout from the financial crisis and restore confidence in the U.S. banking system, Dugan said he is proud of regulators' emergency measures.

He specifically praised the decision to directly inject $125 billion of capital into nine of the biggest U.S. financial firms in October 2008.

The decision was fiercely criticized because the Treasury Department had first said the $700 billion bailout fund that Congress authorized would be used to buy up banks' toxic assets. Some of the big banks also complained, saying they were pressured into the bailout program.

"The money going to the institutions that ... could have the biggest impact if they got into trouble was to me exactly the right prescription," Dugan said.

"I think the other things we looked at, like pulling assets out of banks ... I think it would have been disastrous," he said. "I think it would have led us down a course toward way more losses, lower confidence, nationalization of institutions."

(Editing by Gerald E. McCormick)

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