The Federal Reserve Board’s revisions to capital rules for big banks, approved today, promise in its 972 pages to hike the capital requirements for large, internationally active banks. At the same time, the new rules treat community banks with less stringent regulations.
The rule implements in the US the Basel III capital requirements reforms from the Basel Committee on Banking Supervision. The Committee is an international committee that formulates broad supervisory standards and guidelines for supervision of banks. It has no power itself; it’s an informal forum producing non-binding regulation and recommendations for central banks to either adopt, ignore or adapt. The Federal Reserve Board’s adoption of Basel III, the US banking community, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have been prompted to review and consider the rules as final interim effective July 9, 2013. Banks will nonetheless have a significant amount of time to adapt to the new capital requirements, with pahse-in for the largest institutions commencing in 2014.
Many S&L Holding Companies Currently Exempt
As noted in a letter from NAR Commercial Policy Representative Vijay Yadlapati, a interesting change from the Basel III proposal has been approved by the Fed: savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the final rule at this time. The Federal Reserve will take additional time to evaluate the appropriate regulatory capital framework for these entities.
New Leverage Ratios
If telling banks to not overextend themselves seems like draconian regulation to you, either you have forgotten the 2008 meltdown and subsequent bailout or you’re unaware of what “overextended” actually means in the context of too-big-to-fail banks. The simplified story: under Basel III, banks are being held to a leverage ratio — a requirement to hold onto a minimum amount of capital calculated by taking the amount of “Tier 1” capital it has on the books (the predominant form of Tier 1 capital must be common shares and retained earnings) by the total average of consolidated assets.
The new rules more or less call for not 60% nor 16% but only 6% of bank capital to be held onto as a minimum. A nickel and a penny of every dollar to be kept around if things go south again. Seems reasonable, but then again I don’t work for a bank. Like a lot of people, I just fund the government that bails out the bank when it loses sight of its basic role as capital allocator.