Banks urged to boost capital amid credit crisis

By Dan Wilchins and Rachelle Younglai

NEW YORK/WASHINGTON (Reuters) - Banks are facing calls to boost their capital levels, but doing so will be painful, and some wonder if capital adequacy is even the biggest problem to resolve in the banking system now.

Some of the most important members of the global banking system -- from central bankers to bank chief executives -- are converging on Washington D.C. this weekend to discuss the problems plaguing the financial sector.

High on their list of solutions is higher capital requirements for banks, to shore up confidence in the sector. The Financial Stability Forum, which includes central bankers and global regulators, is expected to recommend on Friday that financial institutions lift capital buffers where appropriate.

But the Institute of International Finance, a global financial services lobbying group, cautioned in a report on Wednesday that even if some firms need to rebuild capital, it would be a mistake to make international capital requirements even more conservative than they already are.

Those two recommendations reflect the broader challenge regulators now face: they must restore faith in the global banking system through measures like boosting capital requirements, but must not burden banks with new rules so onerous that they add to recessionary pressure unnecessarily.

"I think it's way broader than capital levels. I think what will happen is that the whole regulatory investment financial and lawmaking community is beginning to take a look at the whole subject of appropriate regulations of the financial industry," said Steve Bartlett, chief executive of the Financial Services Roundtable, which lobbies on behalf of big financial firms.

Few dispute that banks need more capital. Financial institutions have written down some $300 billion (150 billion pounds) of subprime mortgage assets, among others, and many believe the final total of write-downs could be two or three times that amount.

Those losses give banks two choices: raise equity or shed assets. Financial institutions have so far raised about $180 billion of equity, according to Lehman Brothers' estimates. The gap of more than $100 billion between the equity raised and the assets written down could force financial institutions to trim more than $1.5 trillion of assets, Lehman estimates.