FDIC OKs minimum capital standard for banks

WASHINGTON (MarketWatch) — The Federal Deposit Insurance Corp. on Tuesday adopted a rule requiring U.S. big banks be subject to the same minimum standards for capital as community banks. The rule is part of the government’s ongoing implementation of the Dodd-Frank bank reform act.

Before the rule was established, big financial institutions that have implemented a global bank agreement known as Basel II, named after the Swiss city where past agreements have been reached, could have used their own “internal management assumption” models to calculate how much capital they needed to hold.

That approach would have allowed them to lower their capital levels to standards below that required by community banks. This rule, which has been pushed for by outgoing FDIC Chairman Sheila Bair, eliminates that ability by large financial institutions.

However, new capital requirements based on a global agreement known as Basel III will require higher capital levels and better quality capital.

Nevertheless,Bair said that the rule adopted by the FDIC Tuesday doesn’t require big banks to raise any additional capital. She added that it acts as insurance against the possibility that future regulators will again allow big banks to cut their capital levels to dangerous levels.

“It does ensure that when the crisis is forgotten and models again tell us that risks and needed capital are minimal, that large banks will not be allowed to operate with less capital than main street banks,” Bair said.

Martin Gruenberg, the second in command at the FDIC and the White House’s nominee to replace Bair to head the agency, also said he backed the rule.

“Establishing a floor for risk based capital is a reasonable thing to do, to ensure a foundation level of capital for our institutions,” Gruenberg said.

The rule implements a provision in the new law sponsored by Sen. Susan Collins, Republican of Maine. The adopted rule is based on a proposal introduced by the agency in December.

The Basel III agreement, which was introduced in September, requires banks to hold top-quality capital totaling 7% of their risk-bearing assets and lenders get about eight years to comply. In addition, U.S. and global regulators are working on an agreement that would require the largest global systemically significant banks to hold a capital surcharge beyond the amount required in the September agreement. The Basel Committee on Bank Supervision, an international inter-governmental organization charged with setting capital standards, is considering how high that surcharge should be. 

Ronald D. Orol is a MarketWatch reporter, based in Washington.