Treasury Calls for Stricter Capital Standards by 2010

The US Department of Treasury called for a comprehensive global agreement of stronger capital and liquidity standards for banking firms as a shield from mounting loan losses and the danger of future risk. The agreement should be reached by the end of 2010 and implemented nationwide by Dec. 31, 2012, according to the policy statement. The Treasury wants the design of the new capital requirements to protect the stability of the financial system, not just the balance sheets of individual banking firms. The statement also called for increased requirements and even higher standards for firms that “could pose a threat to overall financial stability.” Not only should banks increase their capital but their diversity of capital, so that losses will not affect a firm’s ability to continue operations. HousingWire sources question the general market’s 5% capital cushion consensus as a conveniently round number without challenge from industry leaders, and said that such a number would drive out the bottom third of the securitization market. But the Treasury’s statement supposes greater oversight of the banking industry is an essential key to reducing systemic risk throughout the financial industry. The Treasury also stated a desire to improve the rules measuring risks in a bank’s portfolio and that banking firms be subject to a non-risk-based leverage constraint. “Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability,” the Treasury said. The call for stricter capital standards comes amid industry concerns that ongoing bank failures may threaten the stability of the financial system. In June, the Americans for Financial Reform invited HousingWire to sit in on a strategy session to call for a change in financial regulation and tighter banking standards. During the session, members from various interest groups supported future regulatory changes by the Administration and criticized the banks’ use of federal funds. The Treasury’s policy statement comes as the total amount of bank failures nears 100 for 2009. HousingWire reported the 84th bank failure last week and the Federal Deposit Insurance Corporation’s (FDIC) $2bn in estimated closing costs. The FDIC issued a list of nonmember banks recently evaluated for compliance with the Community Reinvestement Act (CRA), a law from 1977 intended to encourage insured banks to meet their local credit needs. Most of the banks on the list received a “Satisfactory” rating. Six banks in different regions received “Outstanding” ratings, while Saint Casimir’s Savings Bank in Baltimore, Maryl. and Jefferson Bank of San Antonio, Texas received “Needs Improvement” ratings. The Oakwood State Bank of Oakwood, Texas received a “Substantial Non-Compliance” rating. The list is based on evaluation ratings assigned to the institutions in June 2009 by the FDIC. The FDIC made the evaluation lists of all state nonmember banks public information since July 1, 1990. Write to Jon Prior.

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