Federal Reserve to vote on Basel bank capital rules

The Federal Reserve Building is seen in Washington June 25, 2008.

WASHINGTON (Reuters) - The U.S. Federal Reserve will vote on Tuesday on long-awaited international rules for banks to use more equity capital to fund their business, a critical part of a global drive to make banking safer after the 2007-09 financial crisis.

Small U.S. banks will be scrutinizing the rules - known as Basel III - to see if they are getting the exemptions they lobbied for, and all will be keen to know the deadline for complying with the complex framework.

The Fed may not give banks much leeway, with rising pressure from politicians concerned that not enough is being done to prevent a repeat of the crisis.

"The regulators seem to be emboldened to require more rather than less, and (I think) the changes are going to be much more modest than we might have expected six months ago," said Bill Sweet, a partner with the law firm Skadden, Arps, Slate, Meagher & Flom.

The Basel III accord, named after the Swiss city that is home to its overseer, the Bank for International Settlements, requires banks to borrow less to fund their business, to reduce their risk and protect taxpayers from bailouts.

But there is rising criticism of the system, under which banks can still measure risk using their own mathematical models, and one Fed official, Governor Daniel Tarullo, said in May that the biggest banks might need tougher rules.

Basel III also prescribes a leverage ratio that does not take into account such risk weightings and that functions as a hard cap on borrowing. But at 3 percent, many say it is an unambitious goal in the new framework.

Two U.S. senators have proposed a leverage ratio of five times as much, or 15 percent, for the largest banks, and while the law doesn't stand much of a chance to make it through Congress, it does add pressure to the debate.

The Fed board is scheduled to hold a public meeting starting at 9:30 a.m. on Tuesday. Two other U.S. bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company, also must approve the rules.

The FDIC's second-in-command, Tom Hoenig, is an outspoken critic of Basel III. He harshly criticized the capital levels of Deutsche Bank and other large banks in an interview with Reuters last month.

(Reporting by Douwe Miedema; Editing by Leslie Adler)