US regulators approve bank capital floor

Large banks will have to meet the same minimum capital standards as community banks, under a final rule US banking regulators approved on Tuesday. The rule implements the Collins amendment of the Dodd-Frank financial oversight law, intended to set a capital floor for all US banks and ensure large institutions cannot be less well-capitalised than their small-bank counterparts.
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." 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. The rule will prevent large banks and their holding companies from using a system of risk measurements to determine that they can hold less capital than smaller federally insured depository institutions.
This risk measurement approach is allowed under rules issued in 2007 to implement the Basel II international capital agreement but they have never been utilised by US banks since the financial crisis hit just as this approach was released. Nevertheless, Federal Deposit Insurance Corp 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 J.P. 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.
"Organisations 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.