FDIC's Bair seeks higher short-term capital buffer

WASHINGTON (Reuters) - U.S. regulators should impose even higher capital requirements on large financial firms until they prove they can be wound down if they became insolvent, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.

Bair, in prepared testimony for a Senate Banking Committee hearing, said higher capital requirements would have a "relatively modest" effect on the cost of credit and economic activity.

"I believe we should impose even higher capital charges on systemic entities until they have developed a resolution plan which has been approved as credible by their regulators," Bair said.

JPMorgan Chase & Co Chief Executive Jamie Dimon has criticized international capital standards, known as Basel III, saying the framework will stifle economic growth.

Bair, who is leaving the FDIC on July 8, at the end of her term, also said regulators need to collect detailed information from a limited number of potentially "systemic" financial firms. But she said the request will not automatically mean regulators would designate such a company a "systemically important financial institution," or SIFI.

The SIFI designation comes with strict supervision by the Federal Reserve, higher capital and liquidity requirements and the potential to be dismantled by the FDIC in a crisis.

Under last year's Dodd-Frank Wall Street law, bank holding companies with assets of $50 billion or more automatically fall under "systemic" supervision. That means firms such as Goldman Sachs Group Inc and JPMorgan would likely be among the SIFIs.

Big financial firms that fall outside the banking world have been making their case to the Fed on why they should not be considered for heightened supervision.

Bair also used her testimony to address widespread mortgage servicing problems among U.S. lenders, and congressional struggles to address long-term deficit issues.

She said despite a recent government review, U.S. regulators still do not have a good handle on how bad the servicing errors are, including "robo-signing" and other documentation issues.

"I want to underscore that the housing market cannot heal and begin to recover until this problem is tackled in a forthright manner and resolved," Bair said.

Speaking about long-term fiscal troubles, Bair said financial stability critically depends on Congress reaching an agreement on how to reduce federal debt and deficit levels.

"It is likely that the capital markets themselves will continue to apply increasing pressure until a credible solution is reached," she said.

She also said Congress should change the tax code to reduce or eliminate incentives for financial firms to become excessively leveraged.

(Reporting by Dave Clarke, writing by Karey Wutkowski, editing by Tim Dobbyn)