April 23, 2009 / 5:25 PM / 10 years ago

FDIC lacks know-how to manage nonbank systemic risk: Comptroller

WASHINGTON (Reuters) - The Federal Deposit Insurance Corp has considerable expertise with closing down failed banks but lacks experience in running big nonbank institutions, Comptroller of the Currency John Dugan said on Thursday.

“They don’t have very much experience in running large institutions, which can be required with a systemically important institution when it gets into trouble,” he told a banking conference.

Dugan, whose agency regulates some of the biggest U.S. banks like Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N), said the future structure of banking regulation should include the Federal Reserve and a central focus on prudential regulation of banks.

With Congress formulating a plan to create a system risk regulator, Dugan said the Fed is the logical choice because the central bank already does that for banks and its authority should be expanded for other financial institutions.

Dugan said he supports reducing the number of banking regulatory agencies but declined to say which agencies should be eliminated.

He said the quality of capital at banks needed to be improved by focusing more on tangible common equity (TCE). He said regulators did not get the “impact” they were hoping for by adding capital to banks Tier 1 capital structure.

Tangible common equity is a measure of capital strength that has been commanding more investor attention. It looks at how much common equity is supporting a company and ignores intangible assets such as goodwill, on the theory that, in bad times, intangible assets are less likely to have value.

“There’s no doubt in my mind that there’s been way more focus on tangible capital in the last six months, eight months ... and that’s a phenomenon that’s happening not just in the United States but internationally,” Dugan said.

Dugan declined to discuss the government’s stress testing of the 19 largest banks except to say “we are getting closer.”

U.S. regulators want the top banks to have at least 3 percent tangible common equity, according to a source familiar with regulatory discussions.

Regulators are in the final stages of the stress tests in which the 19 banks are being tested to see how they would fare should the U.S. recession prove to be deeper and longer than currently expected.

An official at the Federal Reserve said last week that some results of the stress tests will be revealed on May 4. Regulators will try to prove the rigor of the tests by releasing a document on Friday that explains the underlying assumptions, the official said.

Reporting by John Poirier, Additional reporting by Karey Wutkowski; Editing by Tim Dobbyn

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