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Inside Washington (03/21/2012)
  •  WASHINGTON (3/22/12)--If Sheila Bair were still heading the Federal Deposit Insurance Corp., as she did between 2006 and 2011, more banks would have failed their stress tests for being over-leveraged, according to a recent MarketWatch interview reported in the March 20 issue of American Banker.  Bair told her interviewer that the Federal Reserve Board should have put a heavier focus on limiting leverage as part of the stress tests of 19 large banks. She said the point of the tests was to take a dry run--see how these 19 would perform in a highly stressed environment. In a stressed situation, Bair said, the market cares only about a bank's leverage ratio--described in the article as the ratio that measures an institution's tangible common equity to total assets. The market just doesn't trust risk-adjusted capital, Bair observed. She called it ill-advised that the Fed drove its decision on dividends based on the institutions' risk-based ratios.  She said she did not think any capital distribution should be allowed that would let a bank's holding company--in a stressed time--hit a leveraged ratio below 4% …


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