WASHINGTON (Reuters) - Large banks will have to meet the same minimum capital standards as their smaller counterparts under a final rule U.S. banking regulators approved on Tuesday.
The rule prevents large banks and their holding companies from using internationally agreed risk measurements to determine that they can hold less capital than smaller federally insured depository institutions.
The rule implements the Collins amendment of the Dodd-Frank financial oversight law, intended to set a uniform capital floor for all U.S. banks.
A Federal Deposit Insurance Corp official said the rule should not have any immediate impact. “Nobody is going to have to raise capital, let’s be absolutely clear.”
Jason Ware, equity analyst at Albion Financial Group in Salt Lake City, Utah, said the rule has an upside and a downside.
“It places a buffer at the banks for the next calamity down the road, but it takes some capital off the table, and I think it will increase the cost of borrowing,” Ware said.
The rule was approved the FDIC board on Tuesday and is being jointly issued by the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency.
A risk measurement approach is allowed under rules issued in 2007 to implement the Basel II international capital agreement but they have never been utilized by U.S. banks since the financial crisis hit just as this approach was released.
FDIC Chairman Sheila Bair and other supporters of the rule argue that the crisis has called into question the merits of a capital system that relies too heavily on a risk-based approach.
The rule ensures “that when the crisis is forgotten and models again tell us that risks and needed capital are minimal, that large banks will not be allowed to operate with less capital than Main Street banks,” Bair said.
The Basel II risk-weighted approach “had us on a path to rely on bank management to set risk-based capital,” Bair said. “Looking back over the crisis, it seems surprising the regulators ever developed the advanced approach.”
The rule would generally impact banks with more than $250 billion in assets, such as Bank of America and JP Morgan Chase.
The final rule is identical to the initial proposal regulators released in December.
Banking groups have argued the rule goes too far and that the Basel II system is more sophisticated than the floor approach in assessing a bank’s capital needs.
The Basel II approach rewards large banks that take less risk by allowing them to hold less capital and the new rule will reduce this incentive, the Financial Services Roundtable wrote in a letter to regulators on February 28.
“Organizations required to maintain higher capital than risk requires will have to recover the cost of unnecessary capital by charging borrowers and other customers more than they otherwise would charge and by paying depositors lower amounts of interest,” the Roundtable wrote.
Banks have also complained that it could make them less competitive with their international rivals who will not have to meet a capital floor.
Acting Comptroller of the Currency John Walsh supported the rule but was concerned it put the United States on a different path than other countries. “It is a move away from international consistency,” he said.
The Collins amendment is just one of many capital rules that banks are facing in the coming months and years.
International regulators have already hammered out the framework of a new Basel III international capital standard, which was endorsed in November by leaders from the Group of 20 developed and emerging nations.
At a minimum, under this pact, banks would hold top-quality capital equal to 7 percent of their risk-bearing assets.
Basel negotiators are expected in the coming weeks to also decide how much additional capital the largest, most internationally active, banks should hold, to offset the risk their failure could pose to world economies and markets.
Banks have complained about all the different capital requirements heading their way.
FDIC officials said on Tuesday that the Collins amendment would complement the new Basel III regime and not be duplicative.
The capital floor rule will go into effect 30 days after it is published in the Federal Register.
Reporting by Dave Clarke; Additional reporting by Joe Rauch in Charlotte, N.C.; Editing by Tim Dobbyn