U.S. Bank Regulator Approves New Capital Rule

01 November 2007

A federal banking agency on Thursday approved a rule that would give large U.S. banks more flexibility in managing their credit risk and calculating their capital reserves. The rule, approved by the Treasury Department's Office of the Comptroller of the Currency, implements international standards that are included in the so-called Basel II framework, named after the Swiss city where it was conceived.

 

The OCC is one of several agencies that needs to approve the rule for it to become effective. The Federal Reserve, Federal Deposit Insurance Corporation and Office of Thrift Supervision must also approve it.

 

The measure allows banks to calculate specific credit risks for different loans within the same class of credit, OCC officials said.

 

Kevin Bailey, a spokesman for the OCC, said that under current rules, banks generally must assign the same risk and reserve the same amount of capital for mortgages, for example, whether they are to extended to borrowers with weak credit or strong credit. The new regulation would allow banks to calculate different risk levels among the mortgages, corporate loans, and other types of credit they extend.

 

The rule establishes capital requirements that are "aligned much more closely to the risks assumed by these institutions," Comptroller of the Currency John C. Dugan said in a statement.

 

The measure will affect the nation's four largest banks -- Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp. -- along with Wells Fargo & Co. and Washington Mutual Inc., among others.

 

Treasury Under Secretary Robert K. Steel said the rule "will modernize our bank capital regime" and make it more competitive internationally.

 

Banks can reduce their capital reserves under the new rule, but would be restricted during a three-year transition period to a 5 percent reduction in the first year, a 10 percent reduction in the second year, and 15 percent in the third.

 

A February report from a congressional watchdog agency said initial estimates show that Basel II would cause "large drops in minimum required risk-based capital" and the "impact on the total amount of capital held by banks, which would include capital held above the regulatory minimum, is also uncertain."

 

The American Bankers Association, however, welcomed the OCC's announcement and said it would reduce "potential competitive inequities with foreign banks already applying this standard."

 

By Christopher S. Rugaber, AP Business Writer

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