Higher Capital Standards Are ‘Moderate,’ Bair Tells Congress

FDIC Chairman Sheila Bair
Sheila Bair, chairman of the Federal Deposit Insurance Corp. Photographer: Andrew Harrer/Bloomberg

U.S. banks are lobbying to escape the “too-big-to-fail” designation that will require them to meet higher capital standards and develop plans for possible failure, Federal Deposit Insurance Corp. Chairman Sheila Bair told lawmakers.

Proposals to increase capital standards to 10 percent are on target, Bair said at a hearing today.

“It sounds moderate,” Bair told a House Oversight and Government Reform subcommittee. “I think it is important we have international agreement.”

The FDIC has supported international efforts to impose tougher capital requirements on systemically important financial institutions, or SIFIs. Global regulators are also proposing that SIFIs hold additional capital buffers.

“The FDIC has detected absolutely no interest on the part of any financial institution in being named a SIFI. Indeed, many institutions are vigorously lobbying against such a designation,” Bair told a House Oversight and Government Reform subcommittee today. “Being designated a SIFI will in no way confer a competitive advantage by anointing an institution as too-big-to-fail.”

Wall Street banks are lobbying to limit how much capital they would be required to hold as regulators weigh whether such buffers are the best way to avert another financial crisis. In the past few weeks, Citigroup Inc. Chief Operating Officer John Havens and executives from JPMorgan Chase & Co. and Bank of America Corp. discussed capital charges with lawmakers, according to people with knowledge of the discussions.

Higher Capital

Global regulators at the Basel Committee on Banking Supervision agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent, for a total of 7 percent of assets weighted for risk.

Firms designated as SIFIs could face an additional 3 percent surcharge on top of the 7 percent requirement under global capital standards being debated by bank regulators. The negotiations are aimed at reaching a final proposal to be presented to the Group of 20 finance ministers and central bankers from the world’s largest economies.

The resolution process “is a transparent process that operates under fixed rules that prohibit bailouts or favoritism in administering the priority of claims,” Bair said in the prepared remarks. “Despite these advantages, there remains skepticism that the SIFIs can be resolved at all, given their size, interconnectedness, and international scope of operations.”

Convertible Debt

In addition to higher capital requirements, some global regulators are calling for at least part of the additional capital to take the form of debt that is convertible to equity.

“The consensus of U.S. regulators is that the higher capital standards should be met solely with common equity,” Bair told the panel’s subcommittee on financial services and bailouts. “Conversion to equity in a stressed situation could trigger a run on the institution, downstream losses to holders of the debt, and potentially feed a crisis.”

Bair also said she was worried about the impact of the European debt crisis on the U.S.

“One of their problems with restructuring of debt is that European banks have a lot of this on their balance sheets,” Bair told reporters after the hearing. “And their capital levels will be challenged because of that.”