Bank regulator warns on capital rule balance

International regulators face a major challenge in creating higher bank capital requirements that add a safety cushion, but do not choke off credit, a top U.S. bank regulator said on Wednesday.

U.S. Comptroller of the Currency John Dugan, whose office regulates the nation's largest banks, said the crisis exposed how antiquated capital standards had left banks vulnerable.

But it is less clear how regulators will be able to craft fresh rules that are neither too soft nor too tough, Dugan said.

"Striking that balance will be the critical challenge facing policymakers in the next several months - made more difficult, perhaps, by today's economic environment of fragile recovery," said Dugan in remarks prepared for the Exchequer Club.

The speech is Dugan's last in his current role, as he is leaving August 14, near the end of his five-year term. His remarks came shortly after President Barack Obama hosted a signing ceremony for the financial reform bill that lawmakers hammered out over more than a year.

Absent from that bill was a dramatic reform of capital standards, a matter typically left to regulators.

The Basel Committee of central bankers and supervisors, based in Switzerland, is in the process of writing new, higher bank capital and liquidity requirements, as ordered months ago by the Group of 20 nations.

The committee is on track in writing rules, but the implementation timetable has slipped.

The G20 said in June it will approve the new Basel package in November, but signaled that countries will get more time to implement changes beyond the original end-of-2012 deadline.

On Tuesday, senior U.S. regulators, including Treasury Department and Federal Reserve officials, highlighted to Congress the need for global cooperation in hardening capital rules.

Dugan said the Basel Committee is "making excellent progress" in better defining what constitutes higher-quality capital, namely capital that focuses on common equity.

But he said defining the new quantitative level of capital required will be more tricky.

"The answer could have a profound effect on the future shape of the banking system, especially for large, internationally active banks," he said.

[Source: By Karey Wutkowski, Reuters, Washington, 21Jul10]

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