By Yali N’Diaye
WASHINGTON (MNI) – The Federal Reserve Tuesday issued proposals to
enhance prudential regulation for large banks and systematically
important nonbank financial firms that mostly embrace the Basel 3
approach.
“The Basel III and (Basel Committee on Banking Supervision)
frameworks, once implemented in the United States, are expected to
significantly enhance risk-based capital and constrain the leverage of
covered companies and will be a key part of the Boards overall approach
to enhancing the risk-based capital and leverage standards,” the Fed
said in its release.
For the key issue of capital surcharge that would apply to the
largest firms, the Fed said the Basel Committee’s framework “is
consistent with the financial stability objectives of section 165 of the
Dodd-Frank Act, including minimizing the threat to U.S. financial
stability posed by systemically important financial companies.”
And even for the timeframe, the Fed said it plans to issue a
proposal based on the Basel Committee’s approach.
“The forthcoming proposal would contemplate adopting implementing
rules in 2014,” the Fed said, with globally systematically important
banks being allowed a phase-in approach through 2019 to meet capital
surcharges.
Still, the Fed left an additional opportunity for U.S. banks to
propose alternatives, asking whether there are “alternatives to the BCBS
framework the Board should consider.”
The current proposal will be open for comment until the end of the
first quarter of 2012, and applies to U.S. bank holding companies with
total consolidated assets of at least $50 billion.
However, “The Board is actively developing a proposed framework for
applying the Acts enhanced prudential standards and early remediation
requirement to foreign banking organizations, and expects to issue this
framework for public comment shortly.”
The Basel Committee has identified about 30 Global systemically
important financial institutions (G-SIFIs), including eight in the U.S.:
Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP
Morgan, Morgan Stanley, State Street, Wells Fargo.
However, for those expecting any specific information on individual
banks and how much additional capital each would need, the Fed did not
provide details.
In the U.S., the the Financial Stability Oversight Council has yet
to designate any SIFI. However, teh FSOC has issued a second notice of
proposed rulemaking and interpretive guidance about the process it will
use to identify those systemically important institutions that will be
subject to enforced supervision.
In the Fed’s proposal Tuesday, large banks will have to meet a Tier
1 capital ratio of 5% in a first phase. In a second phase, the Fed will
issue a proposal for capital surcharge based on the Basel Committee’s
framework.
Liquidity requirements will be phased in as well.
The Fed also proposes annual stress tests, the results of which
will be made public. It also requires internal annual stress tests.
Proposals also address credit exposure to a single counterparty and
“Credit exposure between the largest financial companies would be
subject to a tighter limit.”
Should the firms fail to meet their requirements, the Fed proposes
remediation actions.
“The Board is proposing a number of triggers for remediation–such
as capital levels, stress test results, and risk-management
weaknesses–in some cases calibrated to be forward-looking,” it said.
Firms would have to comply with enhanced standards a year after
they are finalized.
In a recent study by the Boston Consulting Group, banks would need
to raise E354 billion worldwide to comply with Basel 3 capital
requirements.
The shortfall is the largest in Europe at E221 billion, while the
U.S. and Asia-Pacific and U.S. banks face a E70 billion gap, the BCG
report said.
“Raising capital is one way to close this gap, but banks can also
narrow the shortfall by deleveraging balance sheets, spinning off risky
assets, or retaining earnings,” the BCG added in a December report.
Depending on how banks decide to close the gap, it could result in
lower lending if they lower their assets by contracting credit.
Standard & Poor’s estimates capital shortfalls could indeed limit
bank lending.
Using its own methodology, the rating agency said earlier this year
that “rated U.S. banks could fall short by $330 billion to $430 billion
of meeting Basel III” minimum core capital requirements of 7% plus the
extra buffer for the largest institutions.
“In other words, this estimated shortfall would be met by a
reduction in total assets of $4 trillion to $4.8 trillion for rated U.S.
banks, or about one-third of the $12.3 trillion in assets of all U.S.
banks as of Nov. 23, 2011,” Standard & Poor’s said.
The agency built its risk-adjusted capital framework (RACF)
independently from regulatory ratios and approximated core Tier 1
capital ratios “by dividing Standard & Poor’s adjusted common equity
(ACE) by Standard & Poor’s RWAs as of June 2011,” where RWA refer to
risk-weighted assets.
While Standard & Poor’s expects most rated U.S. banks to meet the
heightened capital requirements by 2019, the largest banks “will
experience a shortfall when taking into account the additional buffer
for systemically important bank.”
“Therefore, we expect these banks will continue retaining a
significant amount of earnings, reduce the amount of risk-weighted
assets (RWAs), or a combination of both to meet the fully phased-in
Basel III minimums.”
Fitch Ratings also stressed the impact of Basel 3 on lending.
It said Monday “the Federal Reserve’s official compliance with
Basel III rules requiring the largest banks to boost capital above
minimum requirements could further strain U.S. banks striving to
increase lending and will add burden to an industry already taxed by
regulatory reform.”
The banking industry is expected to quickly react, stressing again
the additional costs of meeting Basel III requirements and the negative
impact it could have on lending.
** Market News International Washington Bureau: 202-371-2121 **
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