Posted on Friday, December 17, 2010
WASHINGTON (By Dave Clarke) - U.S. banking regulators meet on Tuesday to take the first steps toward implementing higher capital requirements set out in the Dodd-Frank financial overhaul law.
The Federal Deposit Insurance Corp board will consider a proposal on how to set minimum capital requirements for banks under a provision in the new law that was added by Sen. Susan Collins of Maine with the strong backing of FDIC Chairman Sheila Bair.
Many lawmakers and regulators came out of the 2007-2009 financial crisis arguing banks did not hold enough high quality capital to deal with the shock to financial system and this contributed to the government having to bail them out.
Banks have voluntarily been building capital levels in the aftermath of the crisis so it is unclear how many would have to bolster their capital.
The proposed rules, part of a busy week by regulators toward implementing Dodd-Frank, may serve mostly to stop capital levels getting too low in the future.
Collins' provision would set a "floor" for capital and leverage requirements.
Bank holding companies would have to meet the same minimum requirements that govern their banking units that are insured and regulated by the FDIC. In the past, capital requirements for holding companies have been less stringent than those for insured depositary institutions.
These minimum requirements would also apply to any non-bank institutions that the government deems to be important to the financial system and therefore subject to supervision by the Federal Reserve.
The rule being considered Tuesday will be the first step in putting the Collins amendment into practice and it will be jointly issued by the FDIC, the Office of the Comptroller of the Currency and the Fed.
Bair said earlier this year she was concerned bank holding companies were relying on their insured depository institutions as a source of capital strength when the opposite should have been the case.
"If, in the future, bank holding companies are to become sources of financial stability for insured banks, then they cannot operate under consolidated capital requirements that are numerically lower and qualitatively less stringent than those applying to insured banks," she said in a May 7 letter supporting Collins' proposal.
A question surrounding the Collins amendment is how it will mesh with the new international capital standards, known as Basel III, which were endorsed in November by leaders from the Group of 20 developed and emerging nations.
The details of that agreement are still being hammered out and U.S. regulators have yet to consider how to implement it.
MF Global financial services analyst Jaret Seiberg said the rule being considered by the FDIC on Tuesday will likely seek to establish a standard based on the existing Basel I and Basel II agreements.
"This matters because the proposal may actually require banks to operate separate capital systems indefinitely, which is a compliance cost as well as a distraction," Seiberg wrote in a research note.
Regulators have until January 2012 to issue final rules implementing all aspects of the Collins amendment.
Also on Tuesday, the FDIC will consider a proposal on how market risk surrounding such things as securitized products should impact capital standards.
The board is also scheduled to vote on a final rule setting a much higher long-term target for the minimum level of its insurance fund as well as its budget for the upcoming year.
(Reporting by Dave Clarke; Editing by Tim Dobbyn)