Capital Rule Eased for Banks Reserving Against Trading Loss

Regulators, confident that big banks can rely on their own computer models, have dropped some minimum capital requirements for institutions with large securities trading operations.

The change was announced Tuesday by the Office of the Comptroller of the Currency and had been approved earlier this month by the Federal Reserve Board and Federal Deposit Insurance Corp.

The decision tweaks rules that take effect Jan. 1, allowing roughly 20 institutions to base their market-risk capital levels on internal models. The change has already been approved by the Basel Committee on Banking Supervision, which sets international capital standards.

The revision deals only with "specific" market risk, which is the potential for losses in individual securities, rather than with broad market declines that would affect an institution's entire investment portfolio.

Originally, large trading banks were going to be required to calculate their "specific" market-risk capital requirement twice-first with a standardized formula adopted by regulators and then using a customized model developed by each institution. The bank then would have to set aside capital equal to the greater of 50% of the standard model or 100% of the customized model.

After bankers complained, regulators decided the dual requirement was unnecessarily burdensome. So they dropped the standardized model.

"We realized there was no logical connection between the models banks were using and the standard requirements," said Christine Cumming, a senior vice president for bank supervision at the Federal Reserve Bank of New York.

Bankers also complained that the two-model imposition contradicted the new rules' purpose, which was to let fiscally conservative institutions reduce the amounts set aside for trading losses.

The rules apply to institutions with trading assets and liabilities exceeding 10% of total assets, or $1 billion. Though few institutions qualify, the ones that do conduct 97% of the banking industry's securities trading, according to the Fed.

Officials at Bankers Trust Co. praised the change. "We feel like we have good models, and we took the lead in getting this eliminated," said BT spokesman William McBride.

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