The Federal Reserve has approved a final rule that will require banks to maintain stronger capital positions. The rule is intended to enable banks to continue making loans to creditworthy households and businesses, even after unforeseen losses and during severe economic downturns, the Fed said.
The rule establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements, particularly for larger, internationally active banking organizations, that became apparent during the recent financial crisis. It will implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Fed said.
In a statement, Fed Chairman Ben Bernanke said the rule will enable banking companies to withstand periods of financial stress.
"This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses while reducing the incentive for firms to take excessive risks," Bernanke said.
The rule increases minimum requirements for the quantity and quality of capital held by banking organizations and includes a new minimum supplementary leverage ratio for the largest, most internationally active banking organizations. This ratio is intended to take into account off-balance sheet exposures.
Fed Governor Daniel Tarullo called adoption of the rule "a milestone" in the Fed's efforts to make the financial system safer.
"While strong capital requirements alone cannot ensure the safety and soundness of our financial system, they are central to good financial regulation, precisely because they are available to absorb all kinds of losses, no matter how unanticipated. Along with the stress testing and capital review measures we have already implemented and the additional rules for large institutions that are on the way, these new rules will be an essential component of a set of mutually reinforcing capital requirements," Tarullo said.
Basel III was initially conceived as an international standard that would apply to the world's largest banks. Earlier proposals would have imposed the same standards on banks of all sizes. Community banks said those standards were too complex and would place too heavy a burden on them.
The final rule incorporates a number of changes to those prior proposals to reduce the regulatory burden on community banks. The Fed said the changes from current regulations target a few areas that are higher risk, but are otherwise minimal. Community banks also will have more time to meet the new requirements.
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