FDIC vote should not trump Fed’s Basel rules

Author: Danielle Myles | Published: 9 Jul 2013
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  • The Federal Reserve’s approval last week of rules implementing Basel III establish the broad capital framework for US banks, irrespective of today’s FDIC vote on an enhanced supplementary leverage ratio;
  • The final leverage ratio to which banks must abide depends on the continuing work of the Basel Committee, which released its latest consultation document on the topic two weeks ago;
  • There are rumours circulating, however, that the leverage capital rules for big banks may be tougher than the Basel Committee's formulation;
  • The Fed’s final rules implementing Basel III are essentially the same as the proposed rules, except for some concessions for community banks.

Since the US Federal Reserve approved rules implementing Basel III last week, speculation has mounted over whether the Federal Deposit Insurance Corporation (FDIC) would go a step further and require stricter leverage ratios for the country’s biggest banks.

But irrespective of the outcome of today’s FDIC meeting, including its vote on enhanced supplementary leverage ratio standards, the Fed’s final rules go a long way to reveal US banks’ new overarching capital framework.

On July 2 the US central bank approved a set of three interagency rules, jointly proposed with the FDIC and Office of Comptroller of the Currency (OCC) in June 2012, which implement the Basel Committee’s latest capital accord.

"While more still needs to be done in certain areas, including the implementation of the supplementary leverage ratio, we now see in pretty good detail what the final outline of the regulatory capital structure will be here in the US," said Morrison & Foerster partner Charles Horn in Washington DC.

Further reading

Fed’s Basel III: how US banks lose

Fed’s Basel III: global harmonisation wins approval

Basel III expected to prompt tier 2 decline

US Basel delay puts heat on Europe

The Fed has stuck with the original proposal in approving a supplementary leverage ratio that is consistent with the Basel III framework and applies to the biggest US banks’ off-balance sheet assets.

The FDIC will vote today on the proposed interagency rules, but as an interim final rule. This is because the agency will also consider an enhanced version of the supplementary leverage ratio.

Sources stressed that as these are interagency rules, it’s unlikely that the Fed would have taken its actions last week without first reaching agreement with the FDIC and OCC.

In addition, it seems that any decision on an enhanced supplementary leverage ratio would pre-empt the Basel Committee’s continuing work on leverage requirements, the latest development being a June 26 consultative document on leverage capital and related disclosure requirements.

"The FDIC is simply beginning the US effort to implement what the Basel Committee has agreed regarding the international leverage ratio, on which the committee issued further guidance on two weeks ago," said Horn.

Sources do note, however, that rumours are circulating that the leverage capital rules for big banks may be tougher than the Basel Committee's formulation.

The Federal Reserve noted that it would adjust its finalised Basel III rules to reflect leverage requirements agreed at the international level.

Proposed versus final rules

Horn noted that the final rules adopted by the Fed are more or less the form in which they were proposed, with some accommodations designed primarily to pick up the concerns of the smaller banks.

These essentially consist of: no changes to the existing risk weights for residential mortgages; the right to opt-out of including accumulated other comprehensive income as part of the bank’s capital; the permanent grandfathering of certain trust preferred securities; and, an extended transition period.

The US’s biggest banks, on the other hand, have received no real concessions.

"The agencies have not highlighted any significant changes to the proposed Advanced Approaches rules, and frankly I don’t think anyone expected them to do so," said Horn.

The OCC is expected to announce its approval of the interagency proposed rules imminently.

See also:

Fed’s Basel III: how US banks lose

Fed’s Basel III: global harmonisation wins approval

Basel III expected to prompt tier 2 decline

US Basel delay puts heat on Europe

 


 

 

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