Depending on one’s perspective, the Federal Reserve’s final rule implementing the Basel III capital reforms and a proposed rule setting higher leverage ratio standards for the largest, most systemically significant U.S. banking organizations — both announced last month — are being perceived in at least three ways: 1) imperfect, but should help avert future taxpayer-funded bailouts; 2) an impediment to banks’ willingness to lend and hence to the economic recovery; or 3) something in between — a step forward that falls short of an ideal definition of adequate capital.
From the perspective of community banks, the best part is that nine out of 10 financial institutions with less than $10 billion in assets would meet the common equity Tier 1 minimum plus buffer of 7 percent in the final rule, based on data from March 31, according to the Federal Reserve. Also, the phase-in for smaller, less-complex banking organizations will not begin until January 2015, while the phase-in for larger institutions begins in January 2014.
The current phase of the great debate over capital adequacy began after the Federal Reserve on July 2 announced a final rule that includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent and a common equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets for all supervised financial institutions. Also, the minimum ratio of Tier 1 capital to risk-weighted assets was raised from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations.
A week later, on July 9, the regulators proposed a new rule that bank holding companies with more than $700 billion in consolidated total assets would be required to maintain a Tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent. In addition, the proposed rule would require banks of covered BHCs to meet a 6 percent supplementary leverage ratio to be considered “well capitalized.”
The American Bankers Association responded sharply to the proposed rule in a statement by Frank Keating, the association’s president and CEO. “This proposal goes beyond Basel III to impose a more difficult standard on our nation’s internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans — including loan commitments and derivatives that hedge risk — more expensive to offer,” Keating said.
The ICBA, on the other hand, was supportive of the measure, saying it “strongly supports regulators’ proposed rule to implement enhanced supplementary leverage ratio capital standards on the largest and riskiest financial institutions.”
FDIC Vice Chairman Thomas Hoenig issued a critical statement following his agency’s approval of an interim final rule consistent with the Fed’s final rule and a notice of proposed rulemaking to raise the supplemental leverage ratio.
Hoenig, who has repeatedly voiced his concerns over proposed Basel III capital rules, said he supports the proposal to raise the supplemental leverage ratio for the financial holding companies and encouraged comment on it. “I cannot support the interim final rule,” he said, “because without a binding leverage ratio, it is incomplete and inadequate.”
Without question, a capital regime that left systemically crucial financial institutions teetering on the brink of failure a few years ago should be strengthened. For now, the appropriate scope of the reforms remains open for debate and begs for resolution — sooner not later.
Bill Poquette is editor-in-chief of BankNews.
Copyright (c) August 2013 by BankNews Media