The Fed and banking regulators from other federal agencies crafted the rules to get the U.S. in line with the new international banking standards known as Basel III, which seek to prevent future global financial crises by modifying and increasing the amount of capital and liquid assets banks have on hand to absorb losses when economic trouble strikes.
The vote, which puts the rules one step closer to being implemented, came at a Federal Reserve open board meeting Thursday, where the board of governors and Fed bank regulators discussed the new rules and how they could impact banks, consumers, businesses and the overall economy.
At the meeting, regulators stressed that, while community banks and credit unions will see some more stringent standards under the new rules, the toughest requirements rules will apply only to the largest "systematically important financial institutions." Fed Chairman Ben Bernanke justified the differing standards by pointing out that the largest banks present the biggest risk to the overall economy and are most able to bear the cost.
The Federal Reserve governors in attendance, including new governors Jerome Powell and Jeremy Stein, were generally supportive of the new rules, but some of them did raise concerns.
Sarah Bloom Raskin, in particular, cautioned that while the new rules would likely make banks more stable, the Fed "cannot declare, 'Mission accomplished.'"
"Risk can develop and lurk in places that no one outside the bank can expect," she said.
She specifically mentioned the risk of fraud as one that's difficult for regulators to account for and protect against, perhaps thinking of failed investment bank MF Global.
For consumers, the impact will likely be mixed. While avoiding a massive financial crisis in the best interest of everyone, including consumers, there will be costs involved as well.
As I wrote last week, the new rules may make it marginally more expensive and difficult for consumers to borrow. That's because banks will have to hold a larger portion of their assets in reserve for economic rainy days, rather than lending them out, and have to hold more capital when they make riskier loans.
Federal Reserve Governor Elizabeth Duke expressed concern about just that issue, highlighting some provisions in the rules that may make it harder for homeowners to tap the equity in their homes for repairs and renovations through home equity lending.
On the plus side, though, the rules could reduce the risk of the sort of massive bank failures that displaced lots of checking and savings account holders. I've heard from lots of former customers of Wachovia and Washington Mutual, and few of them ended up getting a better deal on their checking and savings accounts once those banks went under.
What do you think? Are you willing to accept higher interest rates and harder-to-get loans in exchange for a more stable banking system?
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