Mayer Brown Tells Clients to Brace for Costly Capital Reform
A recent proposal by the Basel Committee on Banking Supervision to create significant capital reforms under the set of risk management regulations, called Basel II, will likely cause financial institutions in the US to face increased capital burdens and cost, according to a recent piece of financial services regulatory commentary release by global law firm Mayer Brown. The proposal, which was released in mid-December for public comment, might ultimately cost US financial firms in regards to regulatory capital compliance, although key details of implementing the proposal's measures have yet to be determined, Mayer Brown lawyers said. According to the law firm, the proposal consists of measures to strengthen the quality and transparency of an institution's capital base as well as increased capital requirements for counter-party credit risk that comes from derivatives, repurchase agreement and securities financing activities. The proposal also introduces a non-risk-adjusted leverage ratio - likely to cause the most controversy, Mayer Brown said - and aims to promote a more counter-cyclical capital framework. The proposal would raise basic minimum Tier 1 and total risk-based capital ratios - but to what degree is not yet disclosed. The proposal contains a "capital buffer" concept that would impose a sliding scale of enhanced regulatory restriction on banks' ability to pay dividends and employee bonuses if regulatory capital minimums are not maintained. "[T]he Proposal will likely have significant implications not just for those banking organizations currently subject to the Basel II regime, but also for the vast majority of US banks that remain outside the Basel II regime," Mayer Brown lawyers said. "In fact, the US bank regulatory agencies have formally urged US banks to submit comments to the Committee on the Proposal and may well consider issuing their own version of the Proposal for public comment later this year." If the proposal is accepted, US firms could face a greater regulatory emphasis on tangible common equity, according to the law firm, as well as more reluctance on the part of regulators to allow institutions to rely on hybrid instruments. Write to Diana Golobay.