Federal banking regulators on Friday took a step back from efforts to meet the international standards and capital rules promoted by the international Basel Committee on Banking Supervision (Basel III), delaying new rules that were set to begin at the start of the year. No alternative timeline was suggested.
“Many industry participants have expressed concern that they may be subject to a final regulatory capital rule on Jan. 1 without sufficient time to understand the rule or to make necessary systems changes,” a joint statement by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency said. “In light of the volume of comments received and the wide range of views expressed during the comment period, the agencies do not expect that any of the proposed rules would become effective [by the effective date].”
The agencies issued three notices of proposed rulemaking in June that, with a suggested effective date of Jan. 1, 2013, would revise and replace the current regulatory capital rules to align them with international Basel III agreements and the Dodd-Frank Act. The final market risk rule amended the calculation of market risk for banking organizations with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more.
Among the capital and liquidity baselines coming from Basel III is a 7 percent requirement for holding “top-quality” (Tier 1) common-equity capital as a balance to, and cushion from, risk-weighted assets (a jump from the mere 2 percent mandated under Basel II).
“As members of the Basel Committee on Banking Supervision, the U.S. agencies take seriously our internationally agreed timing commitments regarding the implementation of Basel III and are working as expeditiously as possible to complete the rulemaking process,” the U.S. regulators added. “As with any rule, the agencies will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods.”
In June, the Federal Reserve estimated that U.S. banks will need $60 billion in shock-absorbing capital to meet the Basel III agreements being developed by multinational regulators and phased in between 2013 and 2019.
Among the outspoken critics who have pushed for a U.S. retreat from Basel III is Thomas Hoenig, a director of the Federal Deposit Insurance Corporation.
“Given the questionable performance of past Basel capital standards and the complexities introduced in Basel III, the supervisory authorities need to rethink how capital standards are set,” Hoenig, former president of the Federal Reserve Bank of Kansas City, said during a recent speech. “Starting over is difficult when so much has been committed to the current proposal. The FDIC is no different from other U.S. and international regulatory agencies where committed staff has devoted enormous effort to drafting and implementing Basel III. However, starting over offers the best opportunity to produce a better outcome”
Last week, the Financial Stability Board designated 28 banks as the world's most systematically important financial institutions, setting the stage for additional “loss absorbency requirements," in the form of a 1-2.5 percent capital surcharge over the international Basel III Common Equity Tier 1 capital requirement for holding at least 7 percent of risk-weighted assets. Institutions are being sorted among "buckets corresponding to their required level of additional loss absorbency" by the consortium of international regulators.