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Paying the price for size – the U.S. doubles up on Basel III

As expected, on 9 July 2013 the FDIC, the OCC and the FRB each issued press releases announcing their adoption of a revised version of Basel III.  In a separate proposal the combined agencies reached a consensus on an increased Tier 1 capital buffer for the largest banks and insurance companies.  While Basel III proposed a 3% capital ratio, the U.S. regulators have decided that the largest bank holding companies will have to reserve regulatory capital amounting to 5% of their assets. Federally-insured subsidiaries will have to reserve 6%. The proposal will apply to banking institutions with more than USD 700 billion in consolidated assets, or USD 10 trillion in assets under custody[1].  The proposed effective date is 1 January 2018.  According to FDIC estimates, the 5% ratio would have required a USD 63billion increase in reserves as of the third quarter 2012, while 6% would have required a USD 89 billion increase. It should be noted that the Basel III ratio denominator includes a number of off-balance sheet items which are not currently included in U.S. capital reserves calculations. The FDIC estimate that the new 6% calculation will be equivalent to about an 8.6% ratio under the old rules.

Insurers will also be subject to the same ratio increase if they have been designated as “systemically important” by the Financial Stability Oversight Council (FSOC).  In a separate ruling on the same day the FSOC voted unanimously to include AIG and GE Capital on the systemically important list. They will join Prudential Financial and are widely expected to appeal the designation.

With a 3-6% range of expectation, the proposed 5% increase is perhaps less than some in the market feared.  Predictably however, the announcement was not met with unalloyed joy.  “While we support financial institutions holding more capital, this new proposal, combined with existing capital and leverage requirements, will make it harder for banks to lend and keep the economic recovery going,” commented Tim Pawlenty, President of the Financial Services Roundtable.

[1] Currently: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

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