June 25, 2010 / 9:28 PM / 9 years ago

UPDATE 2-FDIC's Bair wants US regulators to resist lobbying

* Bair sees lobbyists descending on regulators

* Says Volcker rule, derivatives limits vulnerable

* Says industry overstated impact of capital proposals

(Adds Bair comments on capital rules)

By Karey Wutkowski

WASHINGTON, June 25 (Reuters) - U.S. regulators will have “some latitude” on how to implement the controversial Volcker rule and derivatives restrictions in the financial reform legislation, but must resist lobbying to soften the rules, bank regulator Sheila Bair said on Friday.

“We need to hold the course,” Bair, chairman of the Federal Deposit Insurance Corp and a vocal reform advocate, told Reuters in an interview. “We cannot let ourselves forget what happened in October of 2008 and all the events leading up to that.”

Earlier on Friday, U.S. lawmakers reached agreement on the most wide-ranging overhaul of financial regulations since the Great Depression.

The rules are designed to reduce the chance of another massive crisis like the one that peaked in October 2008 and forced the U.S. government to bail out the financial system.

The House of Representatives and the Senate are expected to finalize the bill as soon as next week, with hopes of President Barack Obama signing it into law by July 4.

After that, regulatory agencies, including the FDIC, will have to write rules to carry out the reforms — a process that will be the subject of intense lobbying, Bair said.

She said key targets will be the Volcker rule, which limits proprietary trading by banks and their ties to hedge funds, and restrictions on derivatives that would force banks to spin off the riskiest swaps dealing to affiliates.

Those provisions have the potential to pinch the profits of some of the biggest Wall Street firms, including Goldman Sachs Group Inc (GS.N) and JPMorgan Chase & Co (JPM.N).

“A lot of the implementation of the Volcker rule and derivatives restrictions — that will be the primary area where regulators will have some latitude,” Bair said.

She said there is a risk that the further the country moves away from the crisis, the more vulnerable reforms will be to lobbying and partisan attempts to scale back the changes.

“We have to keep our eyes on the ball,” she said. “I hope political support continues.”

CRITICISM OF CAPITAL RULES “GROSSLY OVERSTATED”

Bair highlighted changes to capital rules as one of the most significant reforms in the legislation.

The FDIC threw its full support behind an amendment from moderate Republican Susan Collins that would remove so-called “trust-preferred securities” as part of banks’ core capital.

Bair said detractors blew out of proportion the impact of the proposal. She said the market already views the hybrid instruments as lower-quality capital.

Moody’s had said the provision would disqualify $118 billion in trust-preferred securities from Tier 1 treatment.

That figure had been used to claim many banks would be forced to clamor for more capital at a time when the industry is still stressed.

“So many in the industry grossly overstated what the impact on capital raising would be,” Bair said.

She also noted the provision allows for a five-year phase-in, easing its impact.

Bair said the next stage of capital reform will be the work by the Basel Committee of central bankers and supervisors, which is trying to come up with international agreement on tough new capital standards.

Earlier this month, the Basel Committee agreed to delay new requirements on bank trading books by a year after banks argued they need more time.

Bair said regulators should not cave in to pleas from banks to put the brakes on reforms.

“Hopefully, the international regulatory community will hold the course on that,” she added. (Reporting by Karey Wutkowski; editing by Leslie Gevirtz and Andre Grenon)

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