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'Don't starve lending' with bank capital requirements that are too high: ABA President Frank Keating

Bernice Napach

Twenty-nine of the largest 30 U.S. banks passed the latest annual Fed stress tests, demonstrating capital levels high enough to withstand a severe economic downtown. Only Zions Bancorp (ZION) failed.

Frank Keating, president of the American Bankers Association, tells The Daily Ticker the test results are "really good news for stockholders of banks, borrowers, customers and depositors" because they show "the U.S. banking system is very strong."

Related: Banks pass stress test but they’re not taking regulations seriously: Simon Johnson

The results were released Thursday after the market close, and early Friday most big bank stocks, including J.P. Morgan (JPM) and Citigroup (C), were trading slightly higher.

That's not surprising since the strong stress test results presumably mean the Fed will approve plans for banks that passed to raise dividends and extend share buyback plans -- moves which benefit shareholders. The Fed is expected to issue those decisions on Wednesday.

Related: Banks need more capital - the good times won't last forever': Sheila Bair

Though Keating is pleased with the stress test results he's concerned that capital requirements could be too high in some cases. "You want to make sure the capital levels are appropriate and you don't starve lending by having too much capital."

But former FDIC Chair Sheila Bair says some banks still have too much leverage and are releasing too much money from loan reserves in order to boost earnings.

Related: Fannie and Freddie tumble on "idiotic proposal" to wind down GSEs

Keating's response: "The reality is banks have to be strong enough to lend but they also have to be able to lend."

Keating also weighed in on the latest Congressional proposal to phase out Fannie Mae (FNMA) and Freddie Mac (FMCC). The proposal, from Senators Tim Johnson (D-SD) and Mike Crapo (R-Idaho), would replace the mortgage giants with private entities but provide a government backstop for losses after the first 10%.

"I think it's rather interesting that Democrats and Republicans alike at this stage are willing to debate, discuss and are moving in the direction of phasing out Fannie and Freddie, and that is really quite a remarkable sea change, cultural change. "

So will we see GSE reform this year or next?

Keating expects the latest plan will pass the Senate. He's less certain about the House, but hopes it happens.

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