Regulators differ on bank capital impact

WASHINGTON Wed Jun 15, 2011 8:09pm EDT

People walk past the JPMorgan Chase & Co building in New York March 17, 2008. REUTERS/Chip East

People walk past the JPMorgan Chase & Co building in New York March 17, 2008.

Credit: Reuters/Chip East

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WASHINGTON (Reuters) - Top banking regulators are offering differing views on whether additional capital requirements for the largest U.S. banks could hurt the economy.

Federal Reserve and Federal Deposit Insurance Corp officials have downplayed or dismissed banks' argument that the new standards they could face will cause them to lend less at a time when the U.S. economy needs a boost.

Acting Comptroller of the Currency John Walsh, however, is expressing many of the concerns raised by large banks in recent weeks.

"Attempting to wring risk out of the banking system through the device of high capital requirements must be weighed against the costs of less intermediation and potentially lower economic growth," Walsh says in testimony prepared for a U.S. House of Representatives hearing on Thursday.

Walsh said his agency supports requiring large banks to hold a "moderate" amount of additional capital.

Both U.S. and international regulators are wrestling with how much more capital large banks should hold to gird against financial shocks like the 2007-2009 crisis.

Decisions are expected in the coming months.

Bankers such as JPMorgan Chase Chief Executive Jamie Dimon have been arguing that requiring the largest banks to hold an extra level of capital is a step too far and will mean they can provide less of the lending needed to fuel the economy.

Earlier this month, Fed Governor Daniel Tarullo took this argument head on and dismissed it in a speech to the Peter G. Peterson Institute for International Economics.

"To the degree that systemically important institutions find the additional capital requirement makes some lending unprofitable, that lending could be assumed by smaller banks that do not pose similar systemic risk and thus have lower capital requirements," he said.

Tarullo's speech put bankers on edge, and they have been pushing hard on the capital issue since.

Tarullo will appear alongside Walsh and other regulators on Thursday before a House Financial Services Committee hearing on the state of international regulatory reform.

FDIC Chairman Sheila Bair in her testimony takes aim at the banks' arguments saying that recent research suggests "the cost of higher capital requirements in terms of lost economic output is modest."

Officials from large banks and their lobbyists are pressuring regulators to back off plans to require their institutions to hold more capital than the minimum agreed to last year by participants in the international Basel III agreement.

At a minimum, under the Basel pact, banks will hold top-quality capital equal to 7 percent of their risk-bearing assets.

Analysts expect large financial institutions to have to hold additional capital of about 3 percent.

JP Morgan Chief Risk Officer Barry Zubrow plans to tell the House panel that the largest banks should be required to hold no capital beyond this measure because the minimum level is sufficient.

The largest U.S. banks are facing the possibility of having to hold more capital than smaller institutions on two fronts.

The Dodd-Frank law requires the Fed to come up with additional capital requirements for banks with more than $50 billion in assets and for other large financial firms deemed important to the smooth functioning of financial markets and tapped for Fed supervision.

International regulators, as part of the Basel III process, are deciding how much of an added buffer the largest, most internationally active banks should have to meet beyond the minimum requirement.

Tarullo said he hopes that both proposals can be released around the same time in the next few months.

Banks are also complaining that the countries that have signed on to the Basel III agreement will not enforce it equally, creating a competitive disadvantage for U.S. banks.

In his testimony for Thursday's hearing, Tarullo said the Fed will push international regulators to adopt a comprehensive system for ensuring that new capital rules are implemented consistently across different countries.

(Reporting by Dave Clarke, Rachelle Younglai and Karey Wutkowski; Editing by Tim Dobbyn)

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