WASHINGTON (AP) – Federal banking regulators, resolving a lengthy debate, reached agreement Friday on new rules governing the amount of capital the country’s largest banks must hold to protect against potential losses.
The Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. announced in a joint statement the resolution of the various disputes that had kept the rules on capital standards from going into effect.
The new capital standards are often referred to as Basel II for the city in Switzerland where the negotiations over the requirements began in the early 1990s. The new standards employ complex formulas and advanced risk management techniques to determine how much capital – assets including money and stock – a bank must hold to protect against losses. A bank involved in riskier business lines would be required to hold more capital to protect against potential losses.
Regulators hope to have the rules take effect in January. Only the nation’s largest banks will be covered. Estimates range from 10 to 12 institutions that will be covered by the new requirements including banking giants Citigroup Inc. and JPMorganChase & Co.
U.S. and foreign bank regulators agreed on a framework for Basel II in mid-2004 and European banks began using the new standards in January. But implementation was delayed in the United States because U.S. regulators could not agree on the type of safeguards that were needed to protect against a sudden plunge in capital.
Under Friday’s agreement, the banking regulators agreed to publish a study in 2011 analyzing the impact of the new regulations on banks. Depending on the findings of that study, regulators could decide to retain a floor preventing capital levels from dropping by more than 15 percent.
Regulators also agreed to allow banks that aren’t required to adopt Basel II to use a more simplified version of the standard in place of current capital requirements.
Federal Reserve Chairman Ben Bernanke said in a statement that the consensus that banking regulators had reached would “pave the way for implementation of a modern, risk-sensitive capital standard to protect the safety and soundness of our large, complex, internationally active banks.”
Richard Steel, Treasury’s undersecretary for domestic finance, praised the agreement and said resolution of the issue was “an essential component of any effort to modernize our regulatory structure and to strengthen American capital markets’ competitiveness.”
The consensus reached Friday came after Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the top Republican on the panel, had written a letter earlier in the week urging the banking regulators to resolve their differences.
“The successful implementation of Basel II is vital to ensuring that the U.S. banking system is adequately capitalized and that U.S. financial services firms remain competitive in the global economy,” the two senators said in a statement praising Friday’s agreement.
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