Fed may require banks to set aside more reserves
Source: Agencies |
June 9, 2012, Saturday
|
Print Edition
Print Edition
THE Federal Reserve wants United States banks to set aside more money to cushion against unexpected losses, a key step in preventing another financial crisis.
The Fed governors voted 7-0 on Thursday to propose rules requiring all banks hold at least 7 percent of their assets in capital reserves. That's up from a minimum of 2 percent currently required, and more in line with international standards.
The rules are open to comment until September. They will be finalized after that. But some banks won't have to meet the requirements until 2019. That's because the rules have to be coordinated with international standards that are being phased in over the next seven years. The capital requirements for banks were mandated under the 2010 financial overhaul.
"Capital is important to (banks) and the financial system because it acts as a financial cushion to absorb a firm's losses while reducing the incentive for firms to take excessive risks," Fed Chairman Ben Bernanke said at the meeting. The proposed requirements will make the banking system more resilient in times of stress, "thus contributing to the overall health of the US economy."
The banks have lobbied vigorously against the proposals. They say setting aside so much money in reserve could limit what they could lend.
"At a time of economic uncertainty, it will be imperative for regulators to ensure that implementation and enforcement of these new standards will not hamper the ability of financial institutions to help finance economic growth and job creation," Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association, said in a statement.
Experts say most big banks already have increased their capital levels close to the stricter levels.
For smaller banks, though, the increased capital requirements will be "a real wake-up call," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.
Fed Governor Daniel Tarullo told lawmakers on Wednesday that JPMorgan Chase's US$2 billion-plus trading loss is a good example of why the rules are needed. He said JPMorgan was able to weather the loss because it had sufficient reserves.
"A bank with a strong capital position can absorb losses from unexpected sources," he said.
The Fed governors voted 7-0 on Thursday to propose rules requiring all banks hold at least 7 percent of their assets in capital reserves. That's up from a minimum of 2 percent currently required, and more in line with international standards.
The rules are open to comment until September. They will be finalized after that. But some banks won't have to meet the requirements until 2019. That's because the rules have to be coordinated with international standards that are being phased in over the next seven years. The capital requirements for banks were mandated under the 2010 financial overhaul.
"Capital is important to (banks) and the financial system because it acts as a financial cushion to absorb a firm's losses while reducing the incentive for firms to take excessive risks," Fed Chairman Ben Bernanke said at the meeting. The proposed requirements will make the banking system more resilient in times of stress, "thus contributing to the overall health of the US economy."
The banks have lobbied vigorously against the proposals. They say setting aside so much money in reserve could limit what they could lend.
"At a time of economic uncertainty, it will be imperative for regulators to ensure that implementation and enforcement of these new standards will not hamper the ability of financial institutions to help finance economic growth and job creation," Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association, said in a statement.
Experts say most big banks already have increased their capital levels close to the stricter levels.
For smaller banks, though, the increased capital requirements will be "a real wake-up call," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.
Fed Governor Daniel Tarullo told lawmakers on Wednesday that JPMorgan Chase's US$2 billion-plus trading loss is a good example of why the rules are needed. He said JPMorgan was able to weather the loss because it had sufficient reserves.
"A bank with a strong capital position can absorb losses from unexpected sources," he said.
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