US banks 'should raise capital to shield against credit losses'

Charlotte: A top Federal Reserve official said on Friday some banks must raise capital to shield themselves from future losses and it would be better to cut dividends to achieve this than shrink their balance sheets.

"Many financial firms have raised significant capital. Unfortunately, while in many cases these equity issues have offset recent losses, they may leave little additional buffer should further credit losses occur," said Boston Federal Reserve Bank President Eric Rosengren.

"A number of large financial institutions have reduced their dividends, and given the potential for additional capital shortages it goes without saying that financial institutions should continue to assess whether further reductions or cessation of dividends would be advisable," he told a credit market symposium here hosted by the Richmond Fed.

Rosengren, who is not a voting member of the Fed's interest-rate setting committee this year, said "truly well capitalised" counterparties were essential to easing counterparty risk concerns that have dogged the interbank market for months.

He blamed these fears for the premium of the Libor, or London Interbank Offered Rate, above dollar swap rates, which he said was "unhinged".

The interbank cost of borrowing three-month dollars rose on Friday by its biggest daily amount since the beginning of the credit crisis in August, as concerns that Libor quotes had been understated combined with growing doubts about the extent of further further US interest rate cuts.