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“The Federal Reserve shocked bankers Thursday by approving a proposal that would force even the smallest lenders to comply with the elaborate international bank-capital standards known as Basel III,” reports the Wall Street Journal. According to a proposal circulated by the central bank, the draft requirements would apply to all 7,307 U.S. banks. Most bankers had expected regulators to exempt some small lenders from the new rules, which are targeted at shoring up the largest global banks whose troubles fanned the flames of the financial meltdown. According to the Journal, “the tougher capital rules backed by the Fed Thursday won’t take effect until 2019 but will come as an unwelcome surprise to small bankers struggling amid uneven economic growth, tough new rules limiting fees, and technological and regulatory moves that have made larger banks more profitable.” One of the new rules calls for banks to maintain a level of common equity equal to 4.5 percent of their “risk-weighted assets,” along with an additional 2.5 percent “capital conservation buffer.” The Journal concludes, “the total 7 percent common-equity cushion compares to current common-equity standards as low as roughly 2 percent.”
Banking Business Review quotes Fed Chairman Ben Bernanke, who said that capital is important to banking organizations and the financial system because it serves as a financial cushion to absorb a firm’s losses. He further remarked, “With these proposed revisions, banking organizations’ capital requirements should better reflect their risk profiles, improving the resilience of the U.S. banking system in times of stress, thus contributing to the overall health of the U.S. economy.”
CNBC News notes that “the 19 largest U.S. banks are at least $50 billion short of meeting new capital requirements under the Basel III accords.” Smaller U.S. lenders, meanwhile, are nearly $10 billion short of the requirements. Michael Gibson, the Fed’s director of bank supervision, notes that capital requirements for trading activities would be about three times higher than the Fed rules that were in place prior to the financial crisis. The central bank’s proposals, which will be phased in from next year, are part of a bigger package implementing the Basel III accords in the U.S.