Federal Reserve adopts final Basel III rules

The Federal Reserve has approved new banking regulations consistent with Basel III provisions that increase the amount of capital US banks must hold in relation to their risk-weighted assets, including loans.

Banks must now hold at least 4.5 percent of their risk-weighted capital as common equity tier one capital, with a common equity tier one capital conservation buffer of 2.5 percent. The minimum ratio of tier one capital has increased from 4 percent to 6 percent.

The requirement puts the greatest emphasis on common equity tier one capital, which the Fed has identified as the most loss-absorbing form of capital.

“Critically, 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,” said Federal Reserve Chairman Ben Bernanke in a statement. “With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”

In addition to establishing higher capital ratio, the Fed’s actions will also force large, internationally active banks to hold a new minimum supplementary leverage ratio that takes into account off-balance sheet exposure.

“We are very close to completion of a notice of proposed rulemaking that will establish a leverage ratio threshold for these firms above the Basel III required minimum. Despite its innovativeness in taking account of off-balance-sheet assets, the Basel III leverage ratio seems to have been set too low to be an effective counterpart to the combination of risk-weighted capital measures that have been agreed internationally,” Federal Reserve Governor Daniel Tarullo said in a statement.

“Second, we should be ready in the next few months to issue a notice of proposed rulemaking concerning the combined amount of equity and long-term debt these firms should maintain in order to facilitate orderly resolution in appropriate circumstances.”

The Federal Reserve’s Board of Governors approved the proposals unanimously. The Fed coordinated the final rule with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which are expected to review and implement the final rule on 9 July.