Fed sets new capital rules for big banks

The Federal Reserve on Tuesday approved sweeping new capital standards for the nation’s biggest banks and warned the titans of Wall Street that more restrictions were on the way.

In a vote that was unanimous, the Fed agreed to final rules implementing the international Basel III accord, a global agreement that was reached among regulators to beef up capital cushions after the 2008 financial crisis.

“Capital will act as a financial cushion to absorb future losses,” said Federal Reserve Chairman Ben Bernanke. “Strong capital requirements are essential if we hope to have safe and sound banks.”

{mosads}Fed Governor Daniel Tarullo called the new requirements “a milestone in our post-crisis efforts to make the financial system safer.”

Tarullo said more rules would be coming for the eight biggest banks, which have already been determined to be critical to the health of the financial system. The new Basel rules, running 972 pages, will serve as a foundation for further regulatory requirements, he said.

Projects in the works for the big banks include raising the limits on leverage beyond what the Basel accord requires, implementing a global agreement to impose special surcharges, and setting the levels of equity and long-term debt the banks should maintain to ensure they can be wound down easily if trouble strikes.

Large banks would have to begin complying with new Basel rules at the beginning of 2014, while smaller banks would have an extra year to prepare.

Under the final Basel rule, the minimum levels of capital to be held by banks will increase, both in terms of quality and quantity. Large, globally connected financial institutions will also have to comply with a supplementary limit on leverage to take into account dangers that could exist off their balance sheets.

The Fed backed down from a plan to rework how mortgages are treated for risk evaluation purposes, which banks warned could constrain lending at a crucial time for the economy.

The banking industry responded to the final Basel rules with measured criticism. While the plan has improved from its original form, the banks said, it was still unsatisfactory in some ways, including its complexity and the time required to comply.

Frank Keating, head of the American Bankers Association, said the Basel proposal should not be finalized, and urged regulators to continue tweaking the new requirements while they are implemented.

“Basel III exists because Basel I and II didn’t get it right. For that reason, we shouldn’t expect this rule to be perfect either — it’s clear that more needs to be done,” he said.

Keating also called on regulators to conduct a thorough economic analysis of Basel’s impact, saying otherwise the industry will have to “fly blind” without knowing how their business will be affected.

While big banks are prepping for even more rules, community banks got a break in the final Basel standards as regulators stepped back from a more onerous proposal.

Community banks were vocally critical of the original Basel plan, which would have subjected them to the same requirements as Wall Street giants.

The Fed tried to address those concerns, and said community banks would feel a “minimal” impact from the new rules because 90 percent of small banks already meet the new standards.

The Independent Community Bankers of America praised the Fed for ratcheting down the requirements, but said it remained “disappointed” that smaller banks were not exempted entirely from the standards.

Meanwhile, proponents of tough Wall Street reforms were disheartened by the rules as a whole. The reform advocacy group Better Markets called the Fed plan “grossly insufficient,” saying it allowed banks to conduct far too much business with borrowed cash.

“The Fed is allowing the biggest banks in the country, who pose the biggest threat to taxpayers, our financial system and our economy, to finance their activities with 97 percent borrowed money. That is nonsensical and indefensible,” said Dennis Kelleher, head of the group.

Kelleher called on the Fed to use the upcoming rulemakings outlined by Tarullo to take a harder line.

“The long term stability of the financial system depends on whether these yet-to-be-seen proposals are robust,” he said.

Fellow banking regulators are set to approve the Basel proposal later this month and separately vote on it. European regulators have already signed off on it.

Comptroller of the Currency Thomas Curry hailed the package approved by the Fed, saying it struck the right balance between ensuring banks can survive losses without imposing undue strain on smaller institutions.

“The final rule, which I intend to sign next week, incorporates a number of changes designed specifically to ease unnecessary burden on community banks and to respond to the many concerns we have heard from them and others … while preserving the benefits to the financial system that come from higher quality and quantity of capital,” he said in a statement.

But some lawmakers, most notably Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), argue regulators should require more capital cushion for the nation’s largest banks to prevent them from becoming “too big to fail.”

The bipartisan duo has introduced legislation that would impose stricter capital requirements on large banks.

— This story was first posted at 11:03 a.m. and has been updated.