Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Banks Breathe Sigh of Relief Over New Fed Rules

Government Regulation

The new bank regulations proposed by the Federal Reserve on Tuesday marked a significant victory for U.S. banks.

The rules, which were outlined in a 173 page report issued by the Federal Reserve, spell out higher capital requirements and stricter risk controls. But they also promise not to impose higher levels of capital cushions than called for by the international regulatory proposal known as “Basel III.”

Earlier this year there had been significant discussions that the US regulators might impose higher requirements than those called for under Basel III. Banks in the US voiced concerns that this would hamper their ability to compete around the globe. Regulators seem to have accepted this complaint and pared back the capital requirements.

Under Fed’s proposal, banks with more than $50 billion in assets would be required to have a capital cushion equal to 5 percent of assets.

That number will increase over time as the Basel III accords are kick-in in 2016, when capital requirements are expected to slowly be raised to 7 percent plus a sliding-scale based on overall risk of up to 2.5 percent.

As late as last June, many believed that the surcharge could be as high as 3 percent.  The Fed’s point man on banking regulation, Fed governor Daniel Tarullo, indicated that by one formulation of the regulations, systemically important financial institutions could face additional capital requirements that would be perhaps more twice as high as Basel III requirements.

Banks breathed a sigh of relief at the rules announced yesterday. They will be phased in over time and not as onerous as once feared.

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