Greenspan sees need to raise capital levels

Friday, March 19, 2010

Former Federal Reserve Chairman Alan Greenspan said Thursday that regulators may need to compel banks to raise capital levels by as much as 40 percent, saying that it would be a more effective way to ensure stability than new regulatory rules targeting risk.

"The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital," Greenspan said in a paper for a Brookings Institution conference.

Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, he said. Capital cushions should be large enough to prevent failures similar to those of Lehman Brothers Holdings and Bear Stearns, Greenspan said.

Greenspan reiterated his view that Fed policy under his chairmanship did not lead to the housing bubble and the financial crisis by keeping interest rates too low for too long. Instead, a global savings glut led to low mortgage rates and a housing boom, he said.

The former central bank chief said that he and others at the Fed did not understand the extent of the housing bubble and its ramifications for the economy.

-- Bloomberg News

© 2010 The Washington Post Company