LONDON Reuters Excessive bank leverage has had a disastrous effect on the economy, a top U.S. bank regulator said on Tuesday, defending a proposal by the Basel Committee to reshape the financial system and avoid another credit crisis.
In a guest column for the Financial Times, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said strengthening bank capital is a crucial part of financial reform.
Cleaning up bank balance sheets and strengthening the quality and quantity of capital will not be painless, Bair wrote.
But if we fail to follow through in strengthening bank capital, we risk ... exposing the global economy to the onerous and indefensible costs of another financial crisis.
Under a proposal unveiled by the group of global banking regulators on Thursday, all capital instruments other than common stocks could be written-off or converted if a bank is about to be rescued by the state or fail, hitting capital providers -- such as holders of bonds and preferred shares -- before ordinary citizens.
What is really at play here is that some in the industry are arguing their own self-interest, Bair wrote, adding that critics of higher capital requirements fail to account for the social costs created by insufficient capital cushions.
Higher capital requirements mean lower shareholder returns and reduced compensation, she said.
Bair called for a rational capital regime that extends across the global financial system.
If financial reform is about anything, it is about better aligning incentives and internalizing the costs of leverage and risk-taking, she wrote.
Reporting by Karolina Tagaris; editing by Bernard Orr
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