U.S. monitoring banks' sovereign risk exposures

U.S. regulators are closely monitoring banks' exposures to sovereign debt risk, Comptroller of the Currency John Dugan said on Monday.

You can be sure that regulators are looking at this very closely, Dugan, whose agency regulates the largest U.S. banks, said in an interview with Reuters Insider.

When there's any issue like this that is newly emergent and presents new kinds of risk, there are steps that we take to assess and monitor what is going on.

Concerns about banks' concentrations of exposure to sovereign debt have risen since it was revealed that Greece's deficit was three times bigger than originally forecast, plunging the country into a debt crisis and raising concern the volatility could spread to other European countries such as Portugal and Spain.

Last week Federal Reserve Chairman Ben Bernanke said U.S. regulators are probing how Wall Street firms like Goldman Sachs helped Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.

Dugan declined to comment about how any specific institutions may be reacting to sovereign debt issues.

Regarding regulatory reform, Dugan said that banks will likely change their business models to focus less on risky trading, even if Congress does not take up the so-called Volcker rule that would ban banks from proprietary trading and owning or sponsoring a hedge fund.

President Barack Obama in January proposed new limits on big banks' risk-taking, including curbs on commercial banks' ability to engage in proprietary trading for their own profit instead of for clients. White House economic adviser Paul Volcker has been advocating such a proposal for more than a year.

Lawmakers have been considering incorporating a watered-down version of the Volcker rule in their sweeping legislation to reform financial regulation.

Dugan said simply requiring banks to hold more capital if they engage in risky trading could make it less attractive for firms to do so.

I do think requiring higher levels of capital in the future will affect the level and kinds of trading activities that institutions engage in. I think that's appropriate, Dugan said.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)