By Steven K. Beckner

(MNI) – Boston Federal Reserve Bank President Eric Rosengren said
Tuesday that banks have made “quite striking” improvements in their
capital ratios and said this should help them withstand future financial
crises.

Rosengren, in remarks prepared for the Bank for International
Settlements’ Financial Stability Institute in St. Petersburg, Russia,
emphasized the need for the authorities, as well as investors, to focus
on “narrow” or “core” capital — not broader regulatory capital. He also
spoke of the benefits of “stress testing” banks to determine their
capital adequacy.

Rosengren, who is not a voting member of the Fed’s policymaking
Federal Open Market Committee this year, did not talk about the economy
or monetary policy, focusing instead on regulatory issues.

He said the financial crisis forced “a reappraisal of the quantity
and quality of capital needed to avoid a reoccurrence,” leading to the
Fed’s “stress tests” and to higher capital requirements under the
Dodd-Frank Act and the Basel III international risk-based capital pact.

Before the crisis, “many U.S. financial institutions did not have
the quality or quantity of capital needed to withstand the shocks we
recently experienced,” said Rosengren, who added that the crisis showed
“we should be particularly focused on narrow definitions of capital,
which are what investors focused on during the financial crisis.”

By narrow capital he had in mind “tangible common equity,” which
he called “the core capital readily available to cushion the bank
against losses.”

Rosengren noted that Wachovia and Washington Mutual, two of the
biggest financial instituteions to suffer runs during the crisis had a
ratio of tangible common equity to tangible assets only a bit above 2%
and 3% respectively.

Indeed, while their broader definitions of capital were rising,
their tangible common equity were “declining fairly substnatially.”

More recently, Rosengren applauded an increase in narrow capital
from just over 2% to almost 6%.

“This reflects both significant raising of external capital as well
as dramatic declines in dividends and stock buybacks during the crisis
and the early period of recovery” he said. “Both of these dynamics have
had a significant positive impact on the institutions’ ability to
withstand potential future stresses.”

Rosengren added that “the improvement in the quality and quantity
of capital is quite striking.”

** Market News International **

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