US reg­u­la­tors to tackle cap­i­tal stan­dards

La­hore, Is­lam­abad, Karachi Wed­nes­day, De­cem­ber 15, 2010, Muhar­ram 08, 1432

The Pak Banker - - Front Page -

WASHINGTON: US bank­ing reg­u­la­tors meet on Tues­day to take the first steps to­ward im­ple­ment­ing higher cap­i­tal re­quire­ments set out in the Dodd-Frank fi­nan­cial over­haul law.

The Fed­eral De­posit In­surance Corp board will con­sider a pro­posal on how to set min­i­mum cap­i­tal re­quire­ments for banks un­der a pro­vi­sion in the new law that was added by Sen. Su­san Collins of Maine with the strong back­ing of FDIC Chair­man Sheila Bair. Many law­mak­ers and reg­u­la­tors came out of the 2007-2009 fi­nan­cial cri­sis ar­gu­ing banks did not hold enough high qual­ity cap­i­tal to deal with the shock to fi­nan­cial sys­tem and this con­trib­uted to the govern­ment hav­ing to bail them out.

Banks have vol­un­tar­ily been build­ing cap­i­tal lev­els in the af­ter­math of the cri­sis so it is un­clear how many would have to bol­ster their cap­i­tal.

The pro­posed rules, part of a busy week by reg­u­la­tors to­ward im­ple­ment­ing Dod­dFrank, may serve mostly to stop cap­i­tal lev­els get­ting too low in the fu­ture.

Collins' pro­vi­sion would set a "floor" for cap­i­tal and lever­age re­quire­ments.

Bank hold­ing com­pa­nies would have to meet the same min­i­mum re­quire­ments that gov­ern their bank­ing units that are in­sured and reg­u­lated by the FDIC. In the past, cap­i­tal re­quire­ments for hold­ing com­pa­nies have been less strin­gent than those for in­sured de­posi­tary in­sti­tu­tions.

These min­i­mum re­quire­ments would also ap­ply to any non-bank in­sti­tu­tions that the govern­ment deems to be im­por­tant to the fi­nan­cial sys­tem and there­fore sub­ject to su­per­vi­sion by the Fed­eral Re­serve. The rule be­ing con­sid­ered Tues­day will be the first step in putting the Collins amend­ment into prac­tice and it will be jointly is­sued by the FDIC, the Of­fice of the Comptroller of the Cur­rency and the Fed. Bair said ear­lier this year she was concerned bank hold­ing com­pa­nies were re­ly­ing on their in­sured de­pos­i­tory in­sti­tu­tions as a source of cap­i­tal strength when the op­po­site should have been the case.

"If, in the fu­ture, bank hold­ing com­pa­nies are to be­come sources of fi­nan­cial sta­bil­ity for in­sured banks, then they can­not op­er­ate un­der con­sol­i­dated cap­i­tal re­quire­ments that are numer­i­cally lower and qual­i­ta­tively less strin­gent than those ap­ply­ing to in­sured banks," she said in a May 7 let­ter sup­port­ing Collins' pro­posal.

A ques­tion sur­round­ing the Collins amend­ment is how it will mesh with the new in­ter­na­tional cap­i­tal stan­dards, known as Basel III, which were en­dorsed in Novem­ber by lead­ers from the Group of 20 de­vel­oped and emerg­ing na­tions. The de­tails of that agree­ment are still be­ing ham­mered out and U.S. reg­u­la­tors have yet to con­sider how to im­ple­ment it.

MF Global fi­nan­cial ser­vices an­a­lyst Jaret Seiberg said the rule be­ing con­sid­ered by the FDIC on Tues­day will likely seek to es­tab­lish a stan­dard based on the ex­ist­ing Basel I and Basel II agree­ments. "This mat­ters be­cause the pro­posal may ac­tu­ally re­quire banks to op­er­ate sep­a­rate cap­i­tal sys­tems in­def­i­nitely, which is a com­pli­ance cost as well as a dis­trac­tion," Seiberg wrote in a re­search note. Reg­u­la­tors have un­til Jan­uary 2012 to is­sue fi­nal rules im­ple­ment­ing all as­pects of the Collins amend­ment.

Also on Tues­day, the FDIC will con­sider a pro­posal on how mar­ket risk sur­round­ing such things as se­cu­ri­tized prod­ucts should im­pact cap­i­tal stan­dards.

The board is also sched­uled to vote on a fi­nal rule set­ting a much higher long-term tar­get for the min­i­mum level of its in­surance fund as well as its bud­get for the up­com­ing year. -PB News

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