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New Fed rules to drive bank promos?

By Claes Bell, CFA · Bankrate.com
Friday, June 1, 2012
Posted: 5 pm ET

Sick of getting the cold shoulder from your bank? New rules being put in place may make financial institutions more eager to please checking customers in the future.

The Federal Reserve will vote next week on new rules for banks based on Basel III, the international agreement on how much money banks should have on hand at all times to make them more resistant to economic downturns.

From Dave Clark at Bloomberg:

The Fed announced the June 7 meeting, which will be open to the public, on its website Wednesday. The U.S. central bank is expected to put the proposal out for public comment.

The agreement is the cornerstone of efforts by international regulators following the 2007-09 financial crisis to make sure the global banking system is more resilient.

The accord, which is to be phased in from 2013 through 2019, will require banks to maintain top-quality capital equivalent to 7 percent of their risk-bearing assets.

Banks have mostly agreed this minimum level is necessary.

On top of that, however, 28 global "systemic" banks may have to hold up to an additional 2.5 percent buffer.

This provision would hit the largest international financial institutions such as JPMorgan Chase & Co, Goldman Sachs Group Inc and Deutsche Bank AG.

That's a big deal for banking industry professionals, who will have some work ahead to ensure their institutions comply with the rules. But before you break out the proverbial tiny violins, realize it may also have some effects for consumers, including higher rates for loans. One white paper distributed by the International Monetary Fund suggested that loan rates in general would go up 16 basis points as a result of Basel III, or 0.16 percent. That's not a huge amount, but on a mortgage, it's not nothing, either.

On the other hand, Basel III may actually benefit those looking for checking accounts, says Steve Turner, a partner with financial services consulting firm Novantas.

That's because under the new rules, regulators aren't just happy with banks having capital on hand to cover the loans they make, because that capital can lose significant value -- or even become impossible to sell altogether -- in certain economic circumstances. That's exactly what happened in the financial crisis of 2008-2009, when banks that held large quantities of AAA-rated mortgages as capital found themselves unable to liquidate them to cover their financial obligations.

Instead, banks will need to keep a liquidity buffer -- a bucket of cold hard cash, or the next-best thing, highly rated government securities -- on hand at all times. The size of that bucket depends on the banks' obligations, including the deposits it holds from consumers and businesses, which are treated like debt by regulators.

That's where your checking account comes in. Basel III allows banks to loan out a greater percentage of money they hold in checking accounts, because those accounts tend to be very stable. Especially if a person gets their paycheck automatically deposited in a checking account or has multiple accounts with the same institution, they're very unlikely to just close the account -- in effect, collecting the debt the bank owes them -- on any given day.

And that makes a big difference for how a particular bank is allowed to operate under the new rules, says Turner. Say a bank holds $100 million in consumer checking deposits. It can lend out up to $95 million without running afoul of the rules, as long as it parks the rest in Treasuries. But if that $100 million is in commercial nonrelationship deposits, banker-speak for corporations' loose change, that same bank can only lend out $25 million, keeping the other $75 million in reserve.

Since lending is how banks make money, the more money they're able to lend for every dollar they have to keep sitting around in the unprofitable liquidity bucket, the better off they are. That makes your deposits more valuable, particularly if you have direct deposit or multiple accounts with the same bank, Turner says.

"If I'm a bank, I want to plug my retail and small business depositors, and I want to defend them like the dickens against anyone else," Turner says.

To do that, banks may be more willing to do things like offer cash bonuses or forgo fee increases. Or at least be less cavalier about angering checking customers in the future.

What do you think? Would you like to see banks work a little harder for your business?

Follow me on Twitter: @ClaesBell.

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3 Comments
Matt
June 02, 2012 at 7:06 am

The banks need to loan money out to people and help people out with loans to start a business. The financial system needs to be somewhere between 2008 and now. Banks should provide excellent customer service, and do not rip off the consumers. The Federal Government needs to get rid of the idea of a Bail Out. I would like to see banks take risks, in their loans. Some loans are risky, so there needs to be different interest rates based on how risky the loan is. If the bank fails, the bank goes out of business. The FDIC Insurance makes the depositors whole; except for the owners and investors of the bank, and anybody over the FDIC limits. I would like to see the FDIC Depository Insurance Limits at banks raised permanently to $200,000.