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High equity capital best for keeping banks solid - FDIC's Hoenig

PARIS, May 23 (Reuters) - Requiring high levels of equity capital is the best way to ensure banks have solid balance sheets, the second in command at the top U.S. banking regulator said on Monday.

The Federal Deposit Insurance Corporation’s vice chairman, Tom Hoenig, said that as bank creditors had come to expect governments to shield them from losses, they looked less to bank’s equity position as a source of confidence.

And yet, during the 2008-2009 financial crisis, banks with the lowest capital levels failed at nearly twice the rate of the highest-capitalised banks, Hoenig said in a speech prepared for delivery at a conference in Paris.

“In most instances the studies found that the benefits of higher capital outweigh its costs, up to the levels specified under current rules and perhaps beyond, serving the long-run interest of the macroeconomy,” Hoenig said.

“In summary, considerable compelling data suggest that more equity capital -- not less -- is the better choice to attain sound banks and sustained economic growth,” he added.

He warned that a proposal from the Basel Committee on Banking Supervision to use risk-weighted capital in the calculation of banks’ leverage ratios would weaken what he considered the best gauge of their capital adequacy.

Capital standards would fall if regulators gave in to lobbying from the industry for special treatment or exemptions from capital requirements for a host of assets used to calculate banks’ leverage ratios, he said. (Reporting by Leigh Thomas; Editing by Michel Rose)