Regulators have proposed an overhaul of the US capital framework in a long-awaited response to Basel III and Basel 2.5 - but there are differences to the European version of the rules.
Responding to concerns the proposed approach could result in ultra-low risk weights for shaky European sovereigns, the agencies have tightened language that would dictate when government bonds are being restructured or are in default – a trigger for the imposition of a higher risk weight.
The Basel III notices of proposed rule-makings are subject to a 90-day period of public comment. If they are implemented as proposed, the new minimum capital ratios would kick in at the beginning of 2015, while the capital conservation buffer would be phased-in from 2016. The Basel 2.5 rules will come into effect at the beginning of January 2013. That gives US banks a two-year grace period relative to European banks – although institutions on both sides of the Atlantic are trying to achieve Basel compliance before formal implementation of the rules.
“Strong capital buffers help ensure losses are borne by shareholders of a bank [and] not by taxpayers,” said Fed governor Daniel Tarullo, speaking during the June 7 meeting at which the rules were proposed. He criticised capital requirements in place prior the financial crisis, saying they were too low, involved lax risk-weightings, could be satisfied with capital that was not fully loss-absorbing and focused too strongly on the risk of individual firms.
US banking supervisors will go on to consider other rules that are being discussed internationally, he added – such as extra capital surcharges for the biggest banks, and the Basel Committee’s fundamental review of trading book requirements, which will eventually overhaul Basel 2.5.
This article was first published on Risk