The U.S. Federal Reserve is set to vote Tuesday on a final package of long-awaited Basel III capital rules for banks to use more equity capital to fund their business.
The capital accord is meant to strengthen regulation, supervision and risk management in the banking system to reduce the repeat of the 2008 credit crisis. However, smaller lenders have lobbied for exemptions as they didn’t cause markets to seize.
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Over 100 Countries Already Comply With Basel III Rules
Banks across 100 countries, including the U.S., are already complying with Basel III’s risk-based capital rules. These rules assign weighting to assets based on their riskiness. For instance, corporate debt carries a higher risk weight as compared to government bonds. This would necessitate banks to shell out more capital for their corporate debt exposure.
The Basel committee also increased the minimum capital requirements based on risk-weighted assets. The world’s two dozen largest financial institutions need to have common equity equal to 8 percent to 9.5 percent of those assets by 2019. The six biggest U.S. lenders either already meet that requirement or are close, with their risk-weighted capital ratios ranging from 8.4 percent to 9.7 percent at the end of March.
Last week, U.S. banks reportedly presented to the Federal Reserve with a bail-in plan to pay for large bank’s restructuring in the event of a future crisis. Banks’ proposal to FED involves each bank would hold a combined debt and equity equal to 14 percent of its risk-weighted assets.
With increasing pressure from politicians to prevent a repeat of the credit crisis, the U.S. Federal Reserve may not give banks much leeway.
Leverage Ratio For Larger Banks
Recently, Federal Deposit Insurance Company Vice Chairman Thomas Hoening said Basel III accord facilitates lenders to appear well-capitalized, though they are not so well-capitalized. He feels the capital rules permit banks to adopt complicated processes to determine the capital required to support their risky loans. Instead, Hoening suggests a tougher leverage ratio to measure banks’ ability to absorb sudden losses.
Two U.S. senators have proposed a leverage ratio of 15 percent for the largest banks. However, such a steep proposition might not find favor with Congress, though it does add pressure to the debate.
The Basel III rules have to be approved by the two other U.S. bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company.