The U.S. Federal Reserve on Tuesday approved tougher requirements for the amount of capital reserves banks should hold to cushion against unexpected losses, as a way to guard the financial system from risks.
In an unanimous vote, the Fed approved the rule which will bring certain changes mandated in the 2010 financial overhaul law and fall in line with the international Basel III accord. It establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements, particularly for larger, internationally active banking organizations.
The rule must also be approved by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which were expected to act as soon as next week.
Under the rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. All banks will need to maintain a level of high-quality capital equal to 4.5 percent of their risk-weighted assets. It also raises the minimum ratio for tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations.
In addition, large, globally connected financial institutions will also have to comply with a supplementary limit on leverage to take into account off-balance sheet exposures.
The rule would also adjust the method for calculating risk- weighted assets to enhance risk sensitivity.
The phase-in period for smaller, less complex banking organizations will not begin until January 2015 while the phase-in period for larger institutions with assets of 10 billion dollars or more begins in January 2014.
"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 Fed Chairman Ben Bernanke. "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."