US prudential standards to exceed Basel III

Author: Danielle Myles | Published: 20 Dec 2011
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Today the Federal Reserve announced its long-awaited proposal for prudential regulation of systemically important financial institutions (Sifis).

The release indicates US Sifis will be subject to a more onerous regime than their European counterparts; an outcome US banks have lobbied against.

Tuesday’s proposal is the Fed’s proposed rule to implement sections 165 and 166 of Dodd-Frank, and Basel III requirements. It comes after a year of speculation over whether US banks will suffer from an uneven playing field of capital standards.

Based on US attorneys’ first reaction, it seems this will be the case.

“There’s no question that this proposal is way ahead and beyond Basel, and clearly will put US banks at a competitive disadvantage compared to non-US based banks,” said Bob Bostrom, co-head of the global financing institution and funds sector at SNR Denton.

The proposed US Sifi framework goes beyond the capital surcharges and risk-based capital requirements of Basel, outlining stress testing, debt to equity limits, risk management requirements, and single counterparty limits.

The 173-page document poses 80 questions, but it doesn’t lack the clarity of other proposed rules and Bostrom predicts little change between this and the final rule.

An area which could require clearer standards is stress testing. Each Sifi must determine its own methodology to respond to the specified stressed scenarios. This interpretive discretion will lead to discrepancies between how Sifis assess their standing at times of market stress.

The proposal is consistent with the Dodd-Frank provisions mandating the rules, but it is a blow to the industry which has asked for more lenient prudential regulation.

As others have predicted, Bostrom said based on today’s release Sifis can expect increased expenses and decreased profit, and may reconsider their business mix and size.

Non-bank Sifis will suffer the most under the regime, as they will switch from being outside of the Federal Reserve’s oversight, to falling under a new enhanced level of oversight.

The Federal Reserve press release can be viewed here. The deadline for comments is March 31 2012.

Check back in the early new year for IFLR’s detailed analysis of the proposed rules.