WASHINGTON - Money-center banks were caught off guard earlier this week by the Federal Reserve Board's proposal to let them the decide how much capital to set aside for their trading operations.
But by Thursday, some were willing to offer comments cautiously supportive of the idea.
"This proposal shows an encouraging willingness to rely on banks' internal models to measure capital needs," said Mark C. Brickell, a managing director of J.P. Morgan & Co. and a director of the International Swaps and Derivatives Association.
"We welcome another innovative proposal from central bankers about capital for market risk," said Joseph P. Bauman, a senior vice president at Bank of America. "It gives us a lot to think about."
The proposal, drawn up by two economists in the Fed's division of research and statistics, outlined a regulatory scheme in which banks would allot an amount of capital to support their trading operations, then be punished if their losses over a set period exceeded that amount.
It was not on the advance agenda for the Federal Reserve Board's Tuesday meeting, but received a ringing endorsement from Fed Chairman Alan Greenspan and ready approval from the board.
"I'm really intrigued with the timing, because they're supposed to coordinate with the other agencies on this," said banking consultant Bert Ely, who speculated that it may be part of an ongoing banking regulation turf war between the Fed and the Office of the Comptroller of the Currency.
At the latter agency, Susan Krause, senior deputy comptroller for supervision policy, said the Fed had shared with her an earlier staff paper on what it is calling the "precommitment approach" to risk regulation. But she too was surprised that it came up at Tuesday's meeting.
"It does run the risk of confusing the industry about 'Is the Fed going to do it by itself?'," she said, adding that she was "pretty confident" the Fed wouldn't go ahead with the proposal without other bank regulators on board.
The Fed proposal will be open for public comment for 120 days after it is published in the Federal Register - an unusually long period.
Ms. Krause called the "precommitment" idea "intriguing," but said it may turn out to be no less burdensome than the approach endorsed by the Basel Committee on Banking Supervision, which allows banks to use internal models to measure market risk, but requires that regulators examine the models and set capital requirements.
Regulation of market risk matters most to big banks with major trading operations. But capital requirements are of importance to all banks, and one observer said the Fed's proposal was a welcome signal of increasing flexibility in that area.
"It's refreshing to see the board is willing to consider pretty innovative and creative ideas on maintenance of capital," said Gil Schwartz, a partner in the Washington law firm of Schwartz & Ballen.
