The Federal Reserve on Tuesday adopted tougher requirements for banks – part of an international agreement designed to prevent another financial crisis – and opened the door to even stricter rules for the nation’s biggest institutions.
The new standards, part of the Basel III accord, require banks to hold more and higher-quality capital to offset potential losses. The rules also change the way the risks of certain types of assets are calculated.
“With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy,” Fed Chairman Ben S. Bernanke said.
The Fed’s Board of Governors approved the new rules unanimously.
The rules also must be approved by the Federal Deposit Insurance Corp. and the Office of Comptroller of the Currency, which are expected to do so next week.
The new requirements would be phased in starting next year for large banks and in 2015 for small banks.
The vast majority of banks – 95 percent of those with less than $10 billion in assets and all of those with more than that – would meet a key new minimum capital requirement, the Fed said. That requirement is to hold at least 4.5 percent of assets in high-quality capital, up from 2 percent.
But about 100 banks would have to raise a total of $4.5 billion by the time the phase-in period ends in 2019 in order to meet another new requirement that allows them to return capital to their shareholders through dividend payments and stock buybacks.
That requirement is to hold an additional 2.5 percent of assets in high-quality capital, bringing the total needed to 7 percent.
Other capital requirements also were increased.
“While strong capital requirements alone cannot ensure the safety and soundness of our financial systems, they are central to good financial regulation, precisely because they are available to absorb all kinds of losses, no matter how unanticipated,” said Federal Reserve Gov. Daniel K. Tarullo.
“Adoption of these rules assures that, as memories of the crisis fade, efforts to build and maintain higher capital levels will not be allowed to wane,” he said.
The new rules are tougher on large banks that are “internationally active.” And the Fed is close to proposing tougher rules than required under the Basel agreement on the ratio of leverage that the eight largest banks could have.
Those banks, designated as systemically important financial institutions after the 2010 Wall Street reform law, include Bank of America, JPMorgan Chase, Citigroup and Wells Fargo.
Smaller community banks successfully lobbied the Fed to go easier on them in adopting some of the new requirements.
In particular, the Fed ditched new proposed risk calculations for mortgages that would have forced small banks, which do a lot of home lending, to raise more capital.
Federal Reserve Gov. Elizabeth A. Duke said the Fed was concerned that small banks would be overly burdened by new mortgage risk calculations and that the rules could limit the availability of loans.
Fed officials also said they wanted to wait until some other new mortgage regulations are implemented to see what changes might be needed.
Small banks still would be covered by the new capital rules, the Fed said. But because the rules require banks to hold more common stock and retained earnings as capital – the most common capital used by small banks – they will not be burdensome, Duke said.