Federal Reserve Shows Big Banks ‘No Mercy’
The Federal Reserve rejected pleas by the U.S. banking industry in releasing on Thursday a rigorous interpretation of an international agreement on higher capital standards for banks, known as Basel III.
U.S. banks have pushed the Fed, for instance, to allow them to more heavily count mortgage servicing rights and the unrealized gains and losses of certain securities toward their capital requirements than allowed by Basel III, but the U.S. central bank’s draft rule closely follows the international agreement.
“Some of the major, major things the industry, particularly the big banks, were looking for it sounds to me like the Fed showed them no mercy,” said Karen Petrou, managing partner of Washington-based Federal Financial Analytics.
The basics of the Fed’s proposals would capture even the smallest banks, a move likely to irritate community bankers who had been hoping to escape the brunt of the new standards.
The Fed board voted 7-0 on Thursday to put the proposal out for public comment for 90 days. The Federal Deposit Insurance Corp and the Comptroller of the Currency are expected to approve the proposal soon as well.
The Basel agreement is the cornerstone of efforts by international regulators following the 2007-2009 financial crisis to make sure the global banking system is more resilient.
JPMorgan’s announcement last month that a hedging strategy had gone awry, producing at least $2 billion in unexpected trading losses, has been pointed to as a reminder of the need for substantial capital cushions.
The new capital standards would force banks to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses.
The banking industry has complained that the rules could limit their ability to lend.