US banks’ regulatory capital question continues

Author: | Published: 16 May 2013
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Five years following the outset of the financial crisis, the debate regarding regulatory capital levels for US banks only seems to have intensified. The US banking agencies released notices of proposed rulemaking relating to regulatory capital in mid-2012; these proposals were the subject of intense commentary. To meet G-20 commitments, it was assumed final capital requirements for US banks would be released by mid-2013. However, given new legislative proposals, and new recommendations from policymakers, the country seems to be further from any consensus regarding an approach to regulatory capital and prudential regulation.

Recently, Senators Sherrod Brown and David Vitter introduced proposed legislation that would set Basel III aside, and require adoption of new capital requirements focused principally on common equity, or an equity capital ratio, and impose at least a 15% minimum capital requirement on large US banks. The bill also would require separate capital requirements for subsidiaries, and limit the permitted activities of banks and their non-bank subsidiaries. Although the bill may never receive the bipartisan support required for approval, it is nonetheless important in that it illustrates the continuing debate over too-big-to-fail institutions. It also suggests that perhaps the actions that already have been taken following enactment of the Dodd-Frank Act are not sufficiently well-understood.

The Dodd-Frank Act subjects banks to significant supervisory and prudential requirements, including those arising under section 165; requires substantial increases in capital and phases out certain hybrid instruments; imposes new regulations on the OTC derivatives and securitisation markets; and provides for an approach to resolving systemically important institutions. Although many elements of this new framework have been introduced, there are important rules still to be completed. At the same time that the merits of the Brown-Vitter proposal are being evaluated, various other measures are being considered. For example, policymakers have noted that for Orderly Liquidation Authority to function effectively, bank holding companies should be subject to a long-term debt requirement. This might address the need for going-concern or bail-in debt, to which various European regulators already have reacted by implementing new buffer capital standards. Before fully implementing the Dodd-Frank Act requirements, and assessing the impact of these reforms, the Brown-Vitter proposal would adopt an entirely new approach. This seems unwise. Financial institutions should have certainty regarding the rules that affect their business and operations, and time to react to these before the system takes a whole new tack.

By Anna Pinedo of Morrison & Foerster in New York