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Thomas Hoenig, vice-chairman of the Federal Deposit Insurance
Corporation, said the financial system could be rattled if the
Fed continued to hold rates low while the largest banks did
nothing to increase capital reserves.
"The challenge is to find a path that enables central banks to
rebalance monetary policy without shock overwhelming the
financial system," said Hoenig, a leading voice for tough
banking regulations.
That shock could come if the Fed were to suddenly increase rates
while banks lacked capital, said Hoenig.
Banks retain profits or issue stock as a cushion against future
losses. Global banking regulators are debating how much of a
cushion - or 'capital' - leading banks should have.
A global watchdog for banking standards, the Basel Committee on
Banking Supervision, is writing new capital rules.
European Union regulators and other officials expect those
standards will ease some capital standards.
The Basel Committee meets in Chile on Nov. 28-29 to finalize the
rules.
On Thursday, Hoenig said regulators were misguided if they
expected banks to extend credit once they had lower capital
standards.
"Allowing financial firms to operate at minimum capital levels
fails to accelerate economic growth and leaves the system more
vulnerable to shock," he told a meeting at the Cato Institute, a
libertarian think tank in Washington.
(Reporting By Patrick Rucker)
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