Fed Wants Hike in Reserves as Bank Risks Rise
The Federal Reserve Board is proposing regulations that would raise the amount of capital that banks must hold and require banks with riskier investments to have more capital than banks engaged in more conservative activities.
The Fed agreed Wednesday to seek public comment on the proposal that would supplement existing regulations governing the amount of capital that banks must have on hand to absorb unanticipated losses and ensure the safety of depositors’ funds.
“This is simply another tool to deal with some of the shortcomings of our existing tools” for gauging the financial stability of banks, Fed Chairman Paul A. Volcker said. “The thrust of this moves in the right direction,” he said.
The proposed regulations are needed to ensure the financial health of banks that are making riskier loans, which carry higher interest rates and the potential of higher profits. However, riskier loans pose a greater threat to a bank’s financial stability because of the potential for loss.
Under the proposal, the risks of different types of assets would be rated--from vault cash at the low end with virtually no risk to unsecured commercial and foreign loans at the high end.
A bank’s capital requirement would be determined by a weighted sum of the requirements for each category of assets.
Board member Martha Seger said she objected to the “cookbook approach” of the proposal, adding: “I wonder if we’re unnecessarily muddying the waters.”
The American Bankers Assn. also objects to the approach because it would require holding of capital in addition to the existing 6% of assets, said Kirk Willison, a spokesman for the association.
“On the whole, the industry’s capital standards are quite adequate,” he said. “The industry has made great strides to increase capital.”
Requiring additional capital would put banks at a disadvantage to savings and loans and other financial institutions not subject to the requirements, and it could discourage banks from taking on higher risks, Willison said.
