A top US bank regulator said she is "very concerned" the European banking system has the potential to become a future source of financial instability, according to testimony due to be given on financial regulatory reform to a US committee.

Federal Deposit Insurance Corp chairwoman Sheila Bair said her deep concerns were based in part on the credit quality of some countries and banks' exposure to the system.

Ms Bair also said it was "just as troubling" that European banks "continue to effectively set their own capital requirements using internal risk estimates, unconstrained by any objective hard limits".

Most regulators and policymakers in the United States agree banks should be forced to hold more capital to protect against losses and help withstand potential tremors in the financial system.

But Ms Bair contends representatives of some major European governments are going out of their way to express public misgivings about following through with the higher capital standards.

"With risk-based capital determined by bank management assumptions, and no leverage constraints on the horizon for several years, the prospects for further banking problems are unsettlingly high," said Ms Bair, who is leaving the FDIC in July.

Ms Bair's comments were prepared for a hearing today by the US House Financial Services Committee into the international aspects of financial regulatory reform.

Reuters