Bair urges Fed to get tough on big banks
* Bair letter urges tougher capital standards
* Says Fed should not have green-lighted dividends
* Letter is also signed by three academics
By Dave Clarke
WASHINGTON, April 4 (Reuters) - Former Federal Deposit Insurance Corp Chairman Sheila Bair is leading an effort to convince the Federal Reserve to get tougher on the largest U.S. banks.
Bair and three academics are urging the Fed to impose more stringent capital standards on financial giants and criticizing the U.S. central bank's recent decision to allow big banks, such as JPMorgan Chase, to boost stock dividends rather than use these funds to fortify their balance sheets.
"We feel compelled to express our grave concerns about the premature capital distributions which the (Fed) approved as a result of stress tests it completed this year and in 2011," they wrote in a March 30 letter to the Fed. "Dividends and buybacks inevitably slow the pace at which these large banks build their capital buffers."
The letter was posted on the Fed's website on Wednesday.
Bair stepped down as FDIC chairman in July 2011 after helping steer the U.S. financial system through one of the worst crises since the Great Depression.
She gained a reputation for driving a hard bargain during bailouts when other policymakers were inclined to be more open-fisted in propping up the financial system as the government scurried to head off an economic disaster. She now serves as a senior adviser at The Pew Charitable Trusts.
The letter from Bair and the academics was sent in response to a set of proposals that the Fed released in December.
Those proposals laid out new standards that bank holding companies with more than $50 billion in assets and other large financial firms will have to meet under the 2010 Dodd-Frank financial oversight law, which was enacted in response to the 2007-2009 financial crisis.
The Fed is collecting feedback on the proposal through April 30.
Bair and her colleagues are urging the Fed to use this set of rules to ratchet up future capital requirements, or how much a bank has to fund itself through equity as opposed to debt, to reduce risk to the financial system.
They argue that the Fed proposal relies too much on the judgment of regulators for keeping an eye on banks and should instead focus on clear rules.
"The strength of supervisory resolve ebbs and flows, in accordance with political will and agency leadership," the letter reads. "In contrast, simple, straightforward rules... remain constant regardless of whether regulation is in or out of fashion."
They said the Fed proposal also ignores a lesson of the financial crisis that when trouble comes, markets only trust firms that have a lot of common equity as opposed to other forms of funding that can be used to meet capital requirements.
To strengthen the proposal, Bair and her colleagues said the Fed should view the Basel III capital agreement struck by the world's largest economies as a floor and require tougher standards for large U.S. banks.
Under the Basel III agreement the world's largest banks are supposed to maintain top-quality capital equal to 7 percent to 9.5 percent of their risk-bearing assets.
Capital standards for big banks have been a flashpoint in the debate over what should be done to avoid a repeat of the financial crisis.
Banks have balked at the toughest proposals, saying they will curtail the amount they can lend, which in turn will hurt the economy.
Supporters of tough reforms have said this argument is overstated, and bigger capital buffers will ensure a safer financial system.
The letter was also signed by Simon Johnson of the Massachusetts Institute of Technology, Anat Admati of Stanford University, and Richard Herring of the University of Pennsylvania.
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