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US Banks Face $60 Billion Capital Shortfall

Shahien Nasiripour and Tom Braithwaite, Financial Times
Friday, 8 Jun 2012 | 2:15 AM ET

The 19 largest US banks are at least $50 billion short of meeting new capital requirements under the Basel III accords, according to rules proposed by the Federal Reserve.

The biggest among them would probably need billions of dollars more by the 2019 deadline to comply fully with the rules.

Smaller US lenders are about $10 billion short of the requirements, the Fed said on Thursday.

The Fed’s proposals, which will be phased in from next year, are part of a larger package implementing the Basel III accords in the US.

Banking regulators want lenders to hold more high-quality capital, and they are taking a more stringent approach when judging the relative riskiness of banks’ assets.

In line with the international agreement, the Fed proposed that banks’ common equity relative to their risk-weighted assets should be 7 percent.

Bigger banks will need to have more capital relative to their competitors because of their importance to the financial system.

Daniel Tarullo, the Fed governor who oversees bank regulation, said that while the capital requirements were “not a sufficient condition for a strong, resilient financial system, they [were] surely a necessary one”.

Some banks will be able to calculate their needed levels of capital using internal models, subject to Fed approval.

Capital requirements for trading activities would be about three times higher, compared with Fed rules before the financial crisis, said Michael Gibson, the Fed’s director of bank supervision.

The Fed also finalized a regulation that would remove all references to credit ratings in bank capital rules.

In its place, banks would be able to judge the risk that some assets would default by using different measures.

Banks will have to hold the same amount of capital against their holdings of sovereign debt issued by Germany as they would for Portugal, Spain and Ireland, for example.

“It is relatively crude, but it is something that is being used for a relatively small portion of the portfolio,” said Stefan Walter, the former secretary-general of the Basel Committee on Banking Supervision, now a consultant at Ernst & Young.

The Fed’s proposal contains a provision, opposed by banks including Citigroup and Wells Fargo , that will allow swings in the market value of securities in banks’ “available for sale” portfolios to affect regulatory capital for the first time.

“Clearly that was raised quite a bit here in the US and the proposal stuck to its guns on that issue and stuck to the global agreement,” said Mr Walter.

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