U.S. banks must meet Basel mark as small firms get easier terms

U.S. banking regulators agreed to ease requirements for some of the smallest lenders in a new set of capital standards designed to prevent a repeat of the 2008 crisis that almost destroyed the world’s financial system.

The changes came in the latest version of rules released today by the Federal Reserve, a year after they were first drafted and a week after European counterparts finished their own review. The Fed votes on the 972-page proposal later today, with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency scheduled to follow by July 9.

The U.S., along with 26 other members of the Basel Committee on Banking Supervision, must enact local regulations to carry out a 2010 revision of how minimum capital levels are set for the world’s banks. Those funds serve as a buffer against losses that might cause a global lender to collapse and bring down the entire financial system -- an improbable scenario for U.S. community banks with relatively few assets.

“Community and regional banks don’t pose systemic risks when they fail,” said Coryann Stefansson, who heads the financial services regulatory practice at PricewaterhouseCoopers LLP. “So it’s easier to soften the rules on them without undermining the commitment to Basel or tougher capital rules.”

The rules published today narrow the definition of what counts as capital, in line with Basel’s revisions after the 2008 crisis. They also double the minimum ratio for capital and assets and reclassify derivatives and mortgage-based securities as more risky than in previous versions.

Second Standard

For the biggest lenders, it also includes a capital standard that also includes a capital standard that doesn’t adjust for the risks of the banks’ assets, though an expected increase in that minimum wasn’t ready to be included in this version, according to people familiar with the discussions.

“This framework requires banking organizations to hold more and higher-quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks,” Fed Chairman Ben S. Bernanke said in prepared remarks. “Banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”

Governor Daniel Tarullo, the Fed official in charge of financial regulation and bank oversight, said the capital rules revealed today are “a milestone in our post-crisis efforts to make the financial system safer.”

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