U.S. regulators surprised banks and analysts last year by applying the new Basel framework to most community banks. The U.S. had advocated the standard as a measure to rein in the largest international institutions. U.S. lawmakers and lobbyists said the smallest banks shouldn’t be included because they didn’t cause the 2008 crisis, couldn’t raise capital as easily as the big banks and might have to reduce lending.
Some of the rules, such as the non-risk-based leverage threshold, apply only to the biggest institutions or a smaller sub-group of the top six.
The final version released today softens the blow for the smallest firms. It allows almost all but the biggest firms to opt out of requirements that they take capital charges as the market valuation of their trading assets fluctuates. It also simplifies the risk calculation for mortgages, a process that community banks had argued was too cumbersome and expensive. Those banks, defined as taking deposits and making loans in their local areas, make up more than 90% of U.S. lenders, according to the FDIC.
Banks with less than $15 billion in assets were also allowed to retain some hybrid securities that otherwise would no longer count as capital under Basel III.
About 90% of bank holding companies with less than $10 billion in assets already meet the new minimum capital requirements, the Fed said in a staff memo today. The rest would need about $2 billion in added capital to comply. That shortfall was $3.6 billion in June 2012 when the rules were announced.
Almost 95% of firms with assets of more than $10 billion meet the requirements and the shortfall is $2.5 billion, down from $6 billion last year. The Fed didn’t say which banks fell below the standard. The almost decade-long transition period should give banks enough time to comply, the Fed said.
The rules go into effect Jan. 1 for the largest banks that use internal risk models to calculate capital needs while others get an extra year before starting to comply. The Basel framework has a stage-by-stage compliance scheme, with the requirements for capital going up every year until full levels are reached.
The debate about banking standards revolves around rules designed by Basel’s committee of central bankers and regulators to improve and standardize safety guidelines that govern the world’s banks. The latest version is referred to as Basel III, and while the committee agreed on new standards in 2010, the members have revised components multiple times as local regulators worked to customize the rules to reflect conditions in their own markets.
Only half of the Basel members have completed their local rules so far. The European Union, which has accused the U.S. of dragging its feet, just completed its internal approval process last week. Banks have eight more years to fully comply.
The version published today by the U.S. includes a 3% capital minimum, known as the leverage requirement, that the Basel panel agreed upon in 2010. Under that standard, banks must hold equity and certain allowable hybrid securities equal to 3% of their assets.