Fed proposes new bank capital rules

From: Financial Times

By Shahien Nasiripour in New York

The US Federal Reserve has proposed new rules requiring the largest financial firms to hold more capital and detailed for the first time since the financial crisis how the central bank will deal with giant banks in distress whose failure could threaten financial stability.

The biggest banks will be required to achieve a 9.5 per cent ratio of core capital to risk-weighted assets by 2019 as part of the so-called Basel III reforms, the Fed announced on Tuesday, in an expected move that mirrors proposals by a group of global banking regulators known as the Basel committee.

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The rules would apply to all US banks with more than $50bn in assets, but the highest capital ratios would be reserved for the largest of the big banks. JPMorgan Chase, Citigroup and Bank of America are among the companies expected to be hit with the most stringent capital requirement.

“A capital surcharge would help require that these companies account for the costs they impose on the broader financial system and would reduce the implicit subsidy they enjoy due to market perceptions of their systemic importance,” the Fed said in its proposal.

Foreign banks with large US operations were spared from the proposed regulations. The Fed said it will issue separate rules for the roughly 100 foreign-based financial institutions at a later, unspecified date.

The draft rules also call for heightened liquidity requirements, greater risk management responsibilities for bank boards of directors, tougher restrictions on counterparty exposure between financial companies with more than $500bn in assets and a four-level road map for large distressed companies to be resolved.

Deborah Bailey of Deloitte & Touche, a former deputy director of bank supervision at the Fed who helped develop the 2009 stress tests, said the Fed’s draft rules are a reflection of the regulator’s increased focus on banks’ ability to fund themselves during times of crisis.

However, the banking industry secured a temporary victory in how its liquidity needs will be measured.

The Basel committee’s proposals call for strict measurements on how companies will be required to show they could withstand a 30-day bank run.

Lenders in the US and in Europe have argued that the “liquidity coverage ratio” is too stringent and would limit lending. Financial regulators in response have agreed to fine-tune the liquidity standards, where needed, by 2013.

The Fed in turn said it would rely more on banks’ internal modelling of their liquidity needs than rely on its own quantitative projections, though it added that it could do so in the future. The regulator proposed banks measure their liquidity needs in potential times of stress at least monthly.

“The proposal appears to signify a thoughtful approach to liquidity regulation going forward,” said Eli Peterson, vice president and regulatory counsel at the Clearing House Association, a trade group.

But other observers said they were surprised by the Fed’s reference to mortgage-backed securities issued by US-controlled home loan financiers Fannie Mae and Freddie Mac as being “highly liquid assets.”

Financial companies can use their holdings of cash and US Treasuries to meet liquidity requirements. Global regulators sought to limit the amount of Fannie and Freddie securities that could be used to meet liquidity rules.

The Fed, however, included Fannie and Freddie securities, along with cash and Treasuries, in their proposed definition of “highly liquid assets.”

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