U.S. banking regulators proposed rules that would require the nation’s largest lenders to hold more capital to guard against economic stress under terms dictated by the Dodd-Frank financial-regulation overhaul.
The proposal released today by the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. would bar big banks from reducing their capital levels below baselines set for smaller banks. It would also hold large financial holding companies to the same capital requirements as their subsidiaries that take insured deposits.
Dodd-Frank, enacted in July, prevents U.S. lenders from lowering capital holdings using formulas in the Basel II international banking accords. Without such a floor, banks and their holding companies would have been allowed to reduce capital levels over time in accordance with Basel II.
This measure “will do more to strengthen the capital of the U.S. financial system than any other sector of the act,” FDIC Chairman Sheila Bair said in a statement. It “ensures that large institutions operate with at least as much capital in proportionate terms as is required of thousands of Main Street banks nationwide,” she said.
The regulators’ proposal, which is subject to a 60-day public comment period, was included in Dodd-Frank at the request of Senator Susan Collins, a Maine Republican. Supporters including Bair said the measure would ensure big banks and U.S. branches of foreign lenders meet capital standards that are at least as strict as those for smaller banks.
Karen Shaw Petrou, managing director at Federal Financial Analytics, a Washington-based research firm, said the rule underscores the need for banks to focus on their core businesses rather than counting on revenue from proprietary trading.
The new rule will “will redefine U.S. financial markets” Petrou said in a statement. It accelerates “the redefinition of the biggest banks back into banks that need to make money through loans, fees and other sources that don’t have the potential to ‘bet the bank’ like trading,” she said.