* Bair says she supports increase to stabilize system
* Basel III calls for tangible common equity of 7 pct (Adds points on banking policy, context, Lady Gaga remark)
By Ross Kerber
CAMBRIDGE, Mass, Oct 20 (Reuters) - A top U.S. banking regulator said she expects large U.S. banks will have to meet stricter capital requirements than specified in the new international rules known as Basel III.
"I have fairly high confidence there will be higher capitalization requirements for systemic institutions," or large U.S. banks, said Sheila Bair, head of the Federal Deposit Insurance Corp, speaking at Harvard University on Wednesday evening.
She added she plans to consult on the matter with the Federal Reserve, which oversees large U.S. banks more directly.
The new international capital rules known as Basel III, recently agreed to by regulators from 27 countries, call on major banks to maintain tangible common equity levels of 7 percent by 2019, up from 2 percent currently.
Speaking to several hundred people at Harvard, Bair made clear she pushed for tougher rules in Basel, as she has on other policy matters amid the financial crisis.
"The standards aren't as high as many of us would have liked, but they are a big, big improvement," she said. She added that "I do not agree the new requirements will reduce the availability of credit or raise borrowing costs," as some critics have charged.
When a questioner noted some countries have even higher capital requirements than called for in Basel III, Bair said there should be higher requirements in the United States as well for major banks that under old rules could endanger the stability of the financial system if they failed.
Bair, whose agency oversees some 4,800 smaller U.S. banks, made clear the higher capital requirements were part of a broader view she had that policies including those of the new Dodd-Frank financial reform act should discourage the growth of larger banks.
"Concentration is a serious issue. I'm hoping, and expecting, the measures we're putting in place now will create pressures to downsize, not to grow," on financial institutions, she said.
So far the reforms are working, she said, noting that the pace of bank failures is dropping. She fell a few places herself on Forbes Magazine's list of most powerful women and attributed her new spot to an improved economic picture.
"Banks are getting healthier, so my influence is declining," she said, and added a reference to a pop star who also appeared on the list: "Lady Gaga ranked above me ... it was very flattering." (Reporting by Ross Kerber; Editing by Gary Hill)