FDIC’s Bair to Tell Congress Banks Need to Raise More Capital
U.S. banks must be willing to raise capital to guard against a potential financial crisis that could have severe consequences, Federal Deposit Insurance Corp. Chairman Sheila Bair will tell lawmakers at a hearing tomorrow.
“Costs of banking crises for economic growth are severe,” Bair said in testimony prepared for the House Financial Services Committee. “It is the FDIC’s experience that most banks can and do raise capital when needed, even banks in extreme financial difficulties. The most important obstacle to raising capital is often banks’ reluctance to dilute existing shareholders.”
Bair has supported international efforts to impose tougher capital rules on systemically important financial institutions to avoid a repeat of the market turmoil that followed the 2008 bankruptcy of Lehman Brothers Holdings Inc.
The combination of capital surcharges on the world’s biggest banks with higher margin requirements for certain trading accounts “risks doing more harm than good” in regulation, JPMorgan Chase & Co. (JPM) Chief Risk Officer Barry Zubrow said in his prepared remarks for the hearing.
Zubrow’s comments echo those of JPMorgan Chairman and Chief Executive Officer Jamie Dimon, who was applauded by bankers after he pressed Federal Reserve Chairman Ben S. Bernanke to acknowledge that overzealous regulation may stymie recovery from the economic crisis that followed Lehman’s collapse.
“The consensus of recent academic literature, however, is that increases in capital requirements, within the ranges currently being discussed, have a net positive effect on long- term economic growth,” Bair said in her testimony.
The largest systemically important companies could face a 3 percent surcharge on top of a 7 percent minimum requirement under global capital standards being debated by bank regulators. The negotiations are aimed at reaching final proposal to be presented to the Group of 20 finance ministers and central bankers from the world’s largest economies.
Bair, who is stepping down as FDIC chairman next month, pushed to include a requirement in the Dodd-Frank Act giving her agency authority to unwind systemically important financial firms in the event of their failure.
The FDIC rule implementing the authority will require companies with at least $50 billion in assets to provide so- called living wills laying out how they can be wound down.
If such firms can’t be resolved through a bankruptcy framework, the FDIC can do so “in a manner that strictly avoids a bailout,” Bair said in her testimony. “I believe that a precondition for a revival of a truly strong banking and financial system is to put an end to Too Big to Fail.”
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