WASHINGTON - Federal regulators plan to issue a proposal next month that would simplify capital requirements for the vast majority of the nation's banks.
Though officials have hinted at the interagency plan for months, Federal Deposit Insurance Corp. Chairman Donna Tanoue provided the first in-depth preview of it Wednesday at a Women in Housing and Finance luncheon.
She said the FDIC favors streamlined requirements for small institutions engaged in traditional banking activities, because the current risk-based capital standards are "regulatory overkill" for them, and are practically irrelevant to bank management as a useful measure of capital adequacy.
"A capital framework can be developed for small banks with limited business lines that would be more efficient and less burdensome - without compromising prudential standards," Ms. Tanoue said. "This is the right idea at the right time."
The proposal would apply to most of the nearly 9,000 community banks and thrifts, which control about 20% of the industry's assets. Regulators still have to precisely define which small institutions would eligible, though most are expected to qualify, Ms. Tanoue said.
Community bank representatives reacted positively to the proposal.
"It is an excellent initiative on the part of the FDIC and other agencies," said Diane M. Casey, president of America's Community Bankers. "Making a distinction between large and small banks is the right thing to do."
"Capital adequacy rules must recognize the differences in banks based on their size and complexity," said Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America. "A simplified capital regime for noncomplex community banks makes eminent sense and will keep community banks focused on what matters most to them - making loans in their communities."
Under existing rules, all banks and thrifts must meet two minimum capital standards: a capital-to-assets leverage ratio and a risk-based ratio. A bank is required to have a 5% leverage ratio and a 10% risk-based capital ratio to be considered well capitalized.
The leverage ratio compares how much equity shareholders have invested in a bank with how much it has in loans, securities, and other on-balance-sheet assets.
The risk-based ratio divides a bank's assets into four categories, each weighted according to their risk. Cash and very low-risk assets require no risk-based capital to be held against them, mortgages require 5%, and commercial loans require 10%.
Ms. Tanoue said the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FDIC will unveil three options for a simplified system late next month. The three options are a standard capital-to-assets leverage ratio, a simplified risk-based ratio, and a modified leverage ratio that includes risk-based elements.
Under the first alternative, regulators would use a simple leverage ratio to determine capital requirements for community banks.
For 98% of all banks and thrifts, that ratio alone could tell regulators if an institution is well capitalized Ms. Tanoue said. "The primary advantages of the leverage ratio are its simplicity, transparency, and the familiarity banks already have with it."
The system's drawbacks would be its lack of risk sensitivity, and that it might create a disincentive for safer investments, the FDIC chairman said. Also, a bank's off-balance-sheet assets would not be included when determining the proper capital requirement, despite the fact they could present added risk, she said.
The agencies will seek comment on whether there should be a higher leverage requirement as a trade-off for a simpler standard, she said.
Under the second option, regulators would make the risk-based capital standards simpler for community banks. There could be fewer risk categories, less complex calculations, or fewer reporting requirements, Ms. Tanoue said.
The advantage of such a system is that banks would still have incentives to hold safer assets, because riskier assets would require more capital, she said. The drawback, Ms. Tanoue said, is the difficulty of simplifying the approach while accurately reflecting risks.
The third alternative would attempt to combine the best elements of both approaches, using a modified leverage ratio that addresses off-balance-sheet risks. That would make the requirements more sensitive to risks, while keeping the system relatively simple, she said.
Institutions that maintain a low-risk profile would end up having to hold roughly the same amount of capital as a riskier bank, she said.
Ms. Tanoue said that she was not worried that a new system would act as a deterrent to banks that wish to diversify, because the simpler requirements may be voluntary, and community banks planning to grow could opt to continue operating under current standards.
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