Basel III gets green light from banking regulators

Regulators maintain differing opinions on how to craft a safety net for systemically risky financial institutions, but most of them agree a stronger capital system for the financial market must be in place.

As a result, the majority of policymakers approved the final regulatory capital rules for the Basel Committee on Banking Supervision Tuesday, laying the foundation for future banking institution reform. The approvals occurred at an open meeting held by the Federal Deposit Insurance Corp. to finalize Basel III rules already approved by the Federal Reserve.

While there have been bumps along the way — specifically inner agencies failing to agree upon a common consensus of the regulations — finalizing the elements of Basel III will help ensure banks can safely wind down and deal with unexpected losses during a severe economic crisis.

The only dissenting member on the Federal Deposit Insurance Corporation board was Vice Chairman Thomas Hoenig who believes the final rule falls short of specific criteria in developing core financial standards.

Under the approved rule, banking institutions with more than $700 billion in consolidated total assets — or $10 trillion in assets under custody — would be required to maintain a Tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%.

Additionally, the proposed rule will require insured depository institutions to meet a 6% supplementary leverage ratio to be considered ‘well capitalized’ for prompt corrective action purposes.

The FDIC board also approved a capital interim final rule and the Office of the Comptroller of the Currency approved a final capital rule identical in substance to the final rules issued by the Federal Reserve Board on July 2.

“Today, as staff has explained, we are considering two important regulatory capital rulemakings. The first rulemaking is an interim final rule that adopts with revisions the three notices of proposed rulemakings or NPRs that the banking agencies proposed last year,” said FDIC Chairman Martin Gruenberg. 

He added, “These are the Basel III NPR, the Basel III advanced approaches NPR, and the so-called Standardized Approach NPR.” 

The interim final rule on Basel III will strengthen both the quality and quantity of risk-basked capital for all banks, including placing greater emphasis on Tier 1 common equity capital.

While many of the elements contained in the new rules do not apply to community banks, members of the FDIC stated that it full understands the changes in the capital rules that do apply to such firms. 

“To that end the FDIC is planning an extensive outreach program to assist our community banks in understanding the interim final rule and the changes it makes to the existing capital requirements,” Gruenberg stated. 

Market participants listened with a close ear about the details of the supplementary leverage ratio, which would apply to eight institutions.

Insured banks covered by the three notices of proposed rulemaking will need to satisfy a 6% leverage ratio threshold to be considered well capitalized.

This was in line with analysts for Compass Point, who expected regulators to increase the 3% minimum to 5% or 6%.

“Early indications are that the rule will establish different minimums for the covered institution’s parent company as opposed to its FDIC-insured banking subsidiary,” explained Issac Boltansky of Compass Point.

He concluded, “Ultimately, we believe that today’s rulemaking will only provide a framework for the supplementary ratio which means that we will likely be left with a number of unanswered questions (e.g. the treatment of excess reserves and derivative collateral in the calculation).”

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