Default would be "calamitous": FDIC's Bair

Sheila Bair, chairman of Federal Deposit Insurance Corporation, speaks at the Independent Community Bankers of America’s (ICBA) 2011 National Convention and Techworld in San Diego, California March 22, 2011.

WASHINGTON (Reuters) - A senior U.S. banking regulator urged Congress to raise the federal debt ceiling to prevent a "calamitous" government debt default.

As she prepares to step down in July, Federal Deposit Insurance Corp Chairman Sheila Bair told a congressional panel on Thursday she was concerned about the federal debt.

"But as strongly as I feel about this issue, I feel just as strongly that a technical default on U.S. government obligations would prove to be calamitous," she said.

Congress must raise the $14.3 trillion government debt ceiling by August 2 to avoid a default. Both Democrats and Republicans want to pair an increase in the ceiling with steps to bring stubborn trillion-dollar deficits under control, but a compromise along these lines has proved elusive.

"Investor confidence in U.S. Treasury obligations is absolutely vital to domestic and global financial stability and cannot be taken for granted," Bair said. "In the end, that confidence is based solely on the belief that policymakers will do whatever is necessary to make good on the nation's financial obligations.

"Any signal to the contrary risks permanently destroying the inviolable trust that investors the world over have placed in this nation for more than two centuries. I urge Congress to reaffirm this trust by committing to a responsible increase in the debt ceiling."

Bair also told the U.S. House of Representatives Financial Services Committee that new capital standards being developed for the world's largest banks should lean on tangible common equity rather than less reliable convertible debt.

The Basel Committee, a bank oversight group based in Switzerland, is working on the new standards, which would augment more widely applicable standards set in December.

The new standards "must be met with the same tangible common equity that Basel III requires for the new minimum standard for common equity capital. Allowing convertible debt to meet these standards suffers from a number of potential problems," Bair said.

(Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn)