June 12, 2012 / 6:25 PM / 7 years ago

New U.S. regulators question bank capital rules

WASHINGTON (Reuters) - The newest members of the U.S. Federal Deposit Insurance Corp raised concerns on Tuesday that forthcoming international bank capital standards, known as Basel III, might not be tough enough.

At an FDIC meeting, board members Thomas Hoenig and Jeremiah Norton questioned the complexity of the new rules and whether the minimum requirements go far enough.

“I remain concerned that as proposed, the minimum capital ratios will not significantly enhance financial stability,” said Thomas Hoenig, who joined the FDIC board in April after retiring as president of the Federal Reserve Bank of Kansas City.

“The rules continue to focus on risk-based capital ratios, which strike me as overly complex and opaque,” Hoenig said.

The Basel III capital agreement is the cornerstone of efforts by international regulators following the 2007-2009 financial crisis to make sure the global banking system is more resilient.

Despite their reservations, both Hoenig and Norton joined their three colleagues on the FDIC board in voting to put out for 90 days of comment a U.S. proposal for implementing the Basel accord in the United States.

The Federal Reserve and the Office of Comptroller of the Currency have also approved putting the rule out for comment.

A final rule is due by January.

Norton said his worries included the robustness of proposed methods for determining the risk of an asset and, consequently, the corresponding capital requirement.

“I remain concerned that the risk weightings for certain assets and exposures do not reflect sufficiently the inherent risk of default,” he said.

Norton also joined the FDIC in April. Previously, he was an executive director of JP Morgan Securities LLC, where he advised institutions on mergers and acquisitions.


The Basel accord, which is to be phased in from 2013 through 2019, will require banks to maintain top-quality capital equivalent to 7 percent of their risk-bearing assets, about three times what current rules require them to hold.

The new capital standards would force banks to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses.

Banks across the globe have supported boosting capital requirements following the financial crisis. They have complained, however, about the particulars of the Basel agreement and have said it goes too far in the sections aimed only at the largest institutions.

In the United States, both political parties and regulators of all ideological stripes have increasingly rebuffed these complaints.

JPMorgan Chase & Co’s announcement last month that a hedging strategy had gone awry and produced at least $2 billion in unexpected trading losses has been pointed to as a reminder of the need for substantial capital cushions.

JPMorgan Chief Executive Officer Jamie Dimon will testify before the U.S. Senate Banking committee on Wednesday, and senators are expected to press him on his past comments that Basel goes too far and will hurt U.S. banks.

Both Hoenig and Norton said recommended looking at requiring the banks to rely on more stringent leverage ratios, a gauge of how much a bank is funding itself by taking on debt.

“I am very interested in hearing public comment on whether consideration should be given to focusing less on risk-based capital and more on minimum leverage ratios, which are independent of models and less subject to manipulation,” Hoenig said.

Other members of the board expressed more support for Basel III, but emphasized they were eager to sift through critiques from the public and the banking industry.

FDIC acting Chairman Martin Gruenberg said his agency had long had concerns about an aspect of capital rules that allow the largest banks to rely on their own complex formulas to determine the risk of assets.

He said, however, that many of these concerns had been addressed by the 2010 Dodd-Frank financial oversight law, which sets a floor for capital requirements to prevent large banks from using risk models to drop their capital levels too low.

The proposed Basel III rule would affect banks of all sizes, a concern for the smallest U.S. lenders.

The new rules would require tougher capital standards for mortgages, which would have a big effect on community banks, FDIC staff said.

Board members said they would pay close attention to comments from small banks, and Gruenberg said the agency planned to reach out to these companies to explain the proposal.

Reporting by Dave Clarke; Editing by Lisa Von Ahn

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