The Federal Reserve
on Thursday proposed that the country’s banks adopt a broad package of
international regulations aimed at making the global financial system
more resilient to shocks.
The overhaul, designed by a body consisting of central banks and national bank regulators, will require banks to hold sturdier buffers against losses.
The Basel Committee on Banking Supervision devised the rules, known as Basel III, after the 2008 financial crisis revealed the frailty of global banks.
Many of the requirements have been known for months, and banks are already fortifying their balance sheets in preparation. But the Fed’s proposals will be scrutinized for evidence that the regulations will be more stringent than banks expected.
The focus of the overhaul is capital, which banks must hold to protect themselves against losses. The critical requirement compares Tier 1 common capital with a measure of a bank’s assets. The rules introduced Thursday require that Tier 1 common be equal to 7 percent of assets by the end of 2018, when the phase-in period for the regulations ends. Several large American banks already exceed or are close to that capital ratio.
For instance, Citigroup, which was severely undercapitalized when it entered the financial crisis, said it had an estimated Basel III ratio of 7.2 percent at the end of March. JPMorgan Chase, under scrutiny because of a multbillion-dollar loss in a derivatives trade, has not made public a current estimate of its Basel III ratio.
The largest global banks will likely have to have a higher ratio than 7 percent. Regulators are expected to demand that the largest banks hold extra capital to reflect the risk their size presents to the financial system.
The Basel III rules have their critics. Some bankers saying they are overly burdensome, arguing even a slow introduction could crimp lending. Some analysts think the rules are too weak and open to abuse because they allow banks to reduce too much leeway when calculating capital ratios. In particular, these critics point out that Basel III allows banks to hold less capital against assets that are supposedly less risky. The concern is that they will assume certain assets are less risky than they really are.
The Fed’s proposed rules will be open to public comment for 90 days. They are expected to start taking effect next year.
Asad Khan
Financial Analyst (CFB)
050-8774861
asad@cfb.ae
The overhaul, designed by a body consisting of central banks and national bank regulators, will require banks to hold sturdier buffers against losses.
The Basel Committee on Banking Supervision devised the rules, known as Basel III, after the 2008 financial crisis revealed the frailty of global banks.
Many of the requirements have been known for months, and banks are already fortifying their balance sheets in preparation. But the Fed’s proposals will be scrutinized for evidence that the regulations will be more stringent than banks expected.
The focus of the overhaul is capital, which banks must hold to protect themselves against losses. The critical requirement compares Tier 1 common capital with a measure of a bank’s assets. The rules introduced Thursday require that Tier 1 common be equal to 7 percent of assets by the end of 2018, when the phase-in period for the regulations ends. Several large American banks already exceed or are close to that capital ratio.
For instance, Citigroup, which was severely undercapitalized when it entered the financial crisis, said it had an estimated Basel III ratio of 7.2 percent at the end of March. JPMorgan Chase, under scrutiny because of a multbillion-dollar loss in a derivatives trade, has not made public a current estimate of its Basel III ratio.
The largest global banks will likely have to have a higher ratio than 7 percent. Regulators are expected to demand that the largest banks hold extra capital to reflect the risk their size presents to the financial system.
The Basel III rules have their critics. Some bankers saying they are overly burdensome, arguing even a slow introduction could crimp lending. Some analysts think the rules are too weak and open to abuse because they allow banks to reduce too much leeway when calculating capital ratios. In particular, these critics point out that Basel III allows banks to hold less capital against assets that are supposedly less risky. The concern is that they will assume certain assets are less risky than they really are.
The Fed’s proposed rules will be open to public comment for 90 days. They are expected to start taking effect next year.
Asad Khan
Financial Analyst (CFB)
050-8774861
asad@cfb.ae
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