Angell Urges Higher Levels of Capital over 'Long Run.' (Federal Reserve Board Governor Wayne Angell)

Article excerpt

Just how much capital should banks be required to hold?

The long-running debate took a new turn Friday when a Federal Reserve Board governor specified for the first time how much higher minimum capital ratios should be raised.

"For the long run, I would favor risk-adjusted capital ratios of 10% or 12%," Governor Wayne Angell said in a speech at Wake Forest University.

50-Basis-Point Cap

That would represent a substantial increase in requirements. Rules being phased in this year require banks to maintain capital equal to 8% of risk-adjusted assets. That current requirement has already forced a number of banks to tap the financial markets and take other capital-raising actions.

In a telephone interview later, the Fed member declined to specify what he meant by "long run," but he did make clear such an increase would not be feasible under current economic conditions. In any case, he said, capital requirements should not be increased by more than 50 basis points in any particular year.

The proper level of capital ratios has long been the subject of debate. Bankers generally oppose any further increase in requirements, saying that would undermine profitability. But Fed officials, including Chairman Alan Greenspan, have periodically said more capital was needed to strenthen the banking system and shore up the deposit insurance fund.

Less Supervision

Mr. Angell said higher capital levels could "reduce need for regulatory supervision, lowering costs to the banking industry and the government."

But his idea was initially greeted with some skepticism.

"It's not unreasonable to talk of moving gradually to higher levels if the banks' regulatory constrainsts are being loosened at the same time," said James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc., New York.

"But that's not what is happening," he said. "While the Fed itself has been consistent about requiring more capital in the context of less regulation, that's not what you hear elsewhere around Washington." Mr. McDermott's firm is the largest broker-dealer specializing in bank securities.

Anti-Inflationary Tool

During Mr. Angell's speech to a business conference at Wake Forest in Winston-Salem, N. …