Bair, Dugan Spar Over Loan Reserves as Capital

By Joe Adler



Federal Deposit Insurance Corp. Chairman Sheila Bair opened the door Thursday to extending blanket deposit insurance coverage on business accounts, but disagreed with another regulator’s push to count more loan-loss reserves as capital. Speaking at a trade group conference, Bair said her agency strongly opposes allowing more loan-loss reserves to be counted as Tier 2 capital, saying doing so would be dangerous. Her comments came a day after Comptroller of the Currency John Dugan, speaking at the same conference, endorsed the move. “We will be holding pretty firm,” Bair told an American Bankers Association meeting. “There is a lot of focus right now on capital adequacy and the quality of capital.” Letting more reserves count could “dramatically, in our view, dilute the quality of capital.” At issue is a cap, put in place during the 1980s, on the amount of loan-loss reserves a bank may count toward its Tier 2 capital. The cap is equal to 1.25% of the bank’s risk-weighted assets. Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., said holding the limit at 1.25% made sense “in a perfect world.” “The problem is that by limiting reserves in capital and” with “so much of regulatory policy based solely on capital, you create a perverse incentive for banks to try to minimize their reserves,” Petrou said. “That is a very dangerous, perverse incentive, as we learned at extreme cost.” Bair also made by waves by saying the FDIC is considering a further extension of the Transaction Account Guarantee program, which allows banks to insure all non-interest-bearing checking deposits.