http://blogs.wsj.com/economics/2011/06/21/john-walsh-a-regulator-critical-of-over-regulation/

By Victoria McGrane

There aren’t many regulators saying things that big banks want to hear these days, but they’ll like this: Acting Comptroller of the Currency John Walsh on Tuesday warned international regulators that they may be trying to rein in the financial industry too much.

“We are in danger of trying to squeeze too much risk and complexity out of banking as we institute reforms to addresses problems and abuses stemming from the last crisis,” he said at the Centre for the Study of Financial Innovation in London, according to his prepared remarks.

That’s a far different tune from what’s coming from other players in the financial overhaul, who’ve emphasized that banks should get back to the boring business of banking and complexity should be limited.

In contrast, Mr. Walsh argued in his speech that imposing high capital requirements, tight liquidity rules and restrictions on what activities banks can engage in threaten to hurt economic growth.

He urged particular caution on the issue of imposing additional capital requirements on the largest banks — or a “surcharge” on systemically important firms, and his comments come as international regulators are pushing in coming weeks to reach agreement on just how much extra capital the biggest banks must hold.

Mr. Walsh argued that capital levels are already “extraordinarily high by historical standards” and said, at most, a “modest” surcharge on the largest firms may be appropriate. If capital standards are “carried too far, the economy suffers” because higher costs curtail the amount of banking activity necessary for growth, he said.

Mr. Walsh said he is even more skeptical about reform efforts focused on limiting banks’ activities and organization form. The latter is in sharp contrast with Federal Deposit Insurance Corp. Chairman Sheila Bair, who has repeatedly emphasized that regulators must insist that the nation’s biggest financial institutions make structural changes — making their activities “rationalized and simplified” — so regulators can handle their failure without sparking another crisis.

He also pushed back against regulators who would like to define what’s prohibited by the so-called Volcker rule broadly since that could prevent banks from engaging in legitimate banking activities. Championed by former Federal Reserve Chairman Paul Volcker, the rule aims to get commercial banks back to the business of banking and out of certain risky or speculative activities.

“If we draw the circle too narrowly around what we call ‘banking,’ we will unnecessarily restrict legitimate banking activity and raise its cost,” said Mr. Walsh.

 

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