Regulators should cut the amount of capital they require banks to hold against mortgage-backed securities, according to a coalition of financial trade groups.

Banks should be required to hold only $1.60 in capital for every $100 in investment-grade mortgage-backed securities issued by a private lender, the groups said. Banks currently must hold $4 in capital for every $100 of these securities.

In a May 11 letter to Federal Reserve Board Chairman Alan Greenspan, the coalition said current risk-based capital rules encourage banks to hold mortgage-backed securities issued by Fannie Mae and Freddie Mac, because these require only the 1.6% capital charge. That is unfair to private lenders who want to sell mortgage-backed securities, the group said.

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