Fed Voting to Bring U.S. Capital Rules in Line With Basel

U.S. banking regulators seeking to prevent another global financial meltdown are set to impose new minimums for capital amid predictions that smaller lenders will get easier terms.

The Federal Reserve goes first today with a vote that could call for banks to maintain loss-absorbing capital equal to at least 7 percent of risk-weighted assets, in line with international standards agreed upon by the Basel Committee on Banking Supervision.

The global capital accord in 2010 among the 27 countries of the committee is meant to bolster regulation, supervision and risk management in the banking system to reduce the chance for a repeat of the 2008 credit crisis. Smaller lenders have lobbied for exemptions, saying they didn’t cause markets to seize and shouldn’t have to bear the same burden.

“Those are the banks that should enjoy the most relief when these rules are finalized,” said Jaret Seiberg, a senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC.

Seiberg predicted regulators would ease rules on calculations tied to risk and the valuation of certain holdings that could cause volatile swings in capital demands.

After the Fed’s vote, which comes six months after a Jan. 1 deadline set by the Basel committee, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency also must vote on the new standards.

Capital Definition

The rules narrow the definition of what counts as capital, in line with the revisions from the Basel panel. They also double the minimum ratio of capital to assets and reclassify derivatives and mortgage-based securities as more risky than in previous versions.

Regulators repeatedly have said they are trying to be responsive to concerns from community banks that take deposits and make loans in their local areas, which make up more than 90 percent of U.S. lenders, according to the FDIC.

Comptroller of the Currency Thomas Curry said last year that they may get longer transition periods and so-called grandfather clauses to help ease them into compliance. Lobbyists have said smaller firms have less access to capital and might have to reduce lending.

Community Concerns

“We have heard -- and regulators have said -- that they understand the community bank concerns and that they are addressing those concerns,” said James Kendrick, vice president for capital policy at the Independent Community Bankers of America. “We are very hopeful that our cries for help here have been heard.”

The federal agencies are also working on another rule to increase leverage minimums -- possibly doubling the 3 percent in the Basel III rule, people familiar with the discussions have said -- which Seiberg said could boost overall capital demands higher than in Basel III.

The leverage minimum compares a bank’s capital to assets, without making any adjustments for assets that bankers consider less risky. Some regulators including former FDIC chairman Sheila Bair have been skeptical of risk weightings provided by bankers in the wake of the 2008 crisis and as formulas become more complex.

“Why are we spending all this time, money and effort on Basel III?” Seiberg said. A strict new leverage requirement could largely negate Basel’s impact, he said.

Some members of Congress are trying to push even higher capital standards. Under a measure from Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, the handful of banks with more than $500 billion in assets would be told to maintain a capital ratio as high as 15 percent.

The plan is opposed by lawmakers including Tim Johnson, the South Dakota Democrat who leads the Senate Banking Committee, who said Dodd-Frank Act implementation should be finished before trying something else.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.

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