Federal Reserve adopts tougher rules on bank reserves
WASHINGTON — The Federal Reserve adopted tougher requirements for bank balance sheets, sending a message to the financial industry that it will cost much more to remain an institution that’s considered too big to fail.
The rules, approved Tuesday as part of an international agreement designed to prevent another financial crisis, make it more expensive to be a very big bank while going easier than originally proposed on small and medium-size institutions.
Moreover, Fed officials said stricter regulations were coming as soon as this fall for the nation’s largest banks, which some critics warn are a threat to the economy should they fail.
“What they’re really trying to get at is to force the biggest banks to downsize,” said Bert Ely, an independent banking consultant.
The new standards, part of the so-called Basel III accord, require all 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.
Fed Chairman Ben S. Bernanke said the changes mean banks “will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”
The collapse of the subprime mortgage market in 2006 and a resulting credit crunch at banks worldwide sank the nation into its worst recession since the Great Depression. The federal government launched an unprecedented bailout that pumped about $250 billion into U.S. banks. It has since recovered all the money plus interest and dividends.
The Fed’s Board of Governors approved the new rules unanimously. Two other banking regulators, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, also must give their approval, which is expected next week.
More than 95% of those banks with less than $10 billion in assets and all of those with more than that must meet a new minimum capital requirement within 51/2 years, the Fed said. That rule requires banks to hold at least 4.5% of assets in high-quality capital, such as common stock and retained earnings, up from 2%.
But about 100 large and small banks that want to continue paying dividends to shareholders will have to raise a total of $4.5 billion by 2019, when the phase-in period ends. That rule requires banks to hold an additional 2.5% of assets in high-quality capital, bringing the total needed to 7%.
Other capital requirements also were increased.
Frank Keating, head of the American Bankers Assn., said implementation of the international standards was not perfect but “brings us closer to optimal capital rules.” He expected the rules would have to be tweaked as their real-world consequences became known.
The new rules are tougher on large banks than small banks, which successfully lobbied for some relief, including eliminating complex new risk calculations for mortgages.
The phase-in period for large banks would start Jan. 1, while small and medium-size institutions would get until 2015. Small banks also would be allowed to opt out of a new rule on calculating capital that was opposed throughout the industry.
Fed officials said the tougher rules to come would be imposed on the nation’s eight largest banks, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. Those banks were designated as systemically important financial institutions after the 2010 Wall Street reform law.
The Basel agreement set a 3% minimum ratio of high-quality capital to a bank’s assets, but Fed Governor Daniel K. Tarullo said regulators believe that so-called leverage ratio is too low for the eight largest banks. The Fed is considering doubling the ratio to 6%. As of the end of the first quarter, only Wells Fargo had a leverage ratio above 6%, according to an analysis by investment bank Keefe, Bruyette & Woods.
The FDIC said Tuesday it would propose new leverage ratio standards next week.
The Fed also is considering new rules that would require the eight largest banks to issue more long-term debt and hold more capital when using a type of short-term funding.
But some analysts said regulators didn’t go far enough — at least not yet.
Former FDIC Chairwoman Sheila Bair, for instance, has urged regulators to increase the leverage ratio for the largest banks to 8%.
While the Fed is unlikely to set a level that high, “all the signals have been it’s going to be a substantially higher number than 3%, and that certainly will be welcome,” said Bair, who how heads the Pew Charitable Trust’s Systemic Risk Council, a group advocating tighter regulation.
Smaller community banks were able to convince the Fed to go easier on them.
In particular, the Fed ditched proposals to calculate more strictly the risks of mortgage failures, for fear they could hinder community banks from making home loans.
“Those rules are complex. As recent experience has shown, smaller banks do require a high level of capital — but not a complex set of rules,” said banking lawyer Ernie Patrikis, a White & Case partner who spent 30 years with the Federal Reserve.
But despite industry objections, the Fed imposed stricter requirements for capital held against the risks of mortgage servicing, bad news for big home lenders like Wells Fargo.
Mortgage servicing, the business of billing, collections and foreclosures, is dominated by big banks. They said additional capital requirements would cause them to sell the rights to service mortgages more frequently along with the loans themselves, breaking a link to the borrower.
In anticipation of the new standard, Bank of America already has sold hundreds of billions of dollars’ worth of mortgage servicing rights. And Wells Fargo has been retaining more mortgages on its books, in part in reaction to the Fed’s proposal to require more capital to back mortgage servicing rights.
Wells Fargo didn’t address the mortgage servicing issue directly Tuesday, but said it was “confident that we are very well positioned from a capital perspective.”
Puzzanghera reported from Washington, Reckard from Los Angeles.
