Two federal banking regulators addressed the issue of banks using collateralized loan and bond obligations at a conference here Thursday.

"Because they distribute risk better in the economy and the financial system, we as bank supervisors can only say that's great," said Christine M. Cumming, a senior vice president in bank supervision at the Federal Reserve Bank of New York.

However, banks should not use collateralized loan and bond obligations simply to arbitrage capital requirements, Ms. Cumming warned during a meeting sponsored by Risk magazine.

Michael L. Brosnan, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency, said if banks cherry-pick and sell off the highest-quality items in their portfolios, the remaining portfolio would be subject to higher capital requirements. "I'm concerned about it because I think it may not be in the bank's best interest," Mr. Brosnan said.

Ms. Cumming and Mr. Brosnan were part of a larger panel discussion of a controversial plan by the Commodity Futures Trading Commission to regulate over-the-counter derivatives.

A House Agriculture risk management subcommittee plans to hold a hearing on the subject next week. Banks, the largest dealers in OTC derivatives, strongly oppose any new restrictions on derivatives.

-Katherine M. Reynolds, The Bond Buyer

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