WASHINGTON - A Federal Deposit Insurance Corp. bid to make subprime lenders boost their capital levels would affect as few as 21 banks and thrifts nationwide but would hit them hard.

According to a confidential draft proposal obtained by American Banker, 128 financial institutions have subprime portfolios totaling more than 25% of Tier 1 capital, the threshold recommended by the FDIC for automatically applying tougher capital requirements. Of those institutions, 107 already have enough capital to satisfy even the higher standard.

But the other 21 banks and thrifts would be required to set aside at least double the capital they do now under risk-based capital rules. If the annual percentage rates in a lender's subprime portfolio were especially high, regulators might require even more capital. All told, the 21 would have to increase capital by a total of at least $233 million, an average of about $11 million apiece. It is not clear how much time the banks would be given to raise the funds.

The proposal - which was distributed to other regulators in December and which an FDIC spokesman characterized as a "predecisional staff exercise" - said subprime loans demand higher capital because they are relatively risky and are unproven in an economic downturn. According to the draft, nonbank subprime lenders typically maintain capital ratios more than twice as high as banks do because the market demands it.

"Subprime lending is so inherently risky that any significant involvement in this activity demands a minimum level of capital protection exceeding the current regulatory minimums," the FDIC wrote.

Compared with the roughly $40 billion already on reserve in the FDIC's bank and thrift insurance funds, a quarter of a billion dollars might seem inconsequential. But according to the draft proposal, the higher capital requirement would be an important barrier to new market participants who are oblivious of the risks involved.

"What cannot be accurately measured is the extra caution that the industry will exercise when contemplating entry into this market," the draft proposal said. "While the additional capital allocation will probably not deter an experienced, efficient lender, it may deter a lender who is simply looking for a quick-fix way to improve his income statements without regard for the additional risks and costs inherent in this line of business."

Barriers to entry could not come too soon, the FDIC said. According to the draft proposal, a variety of factors - including the strong economy, shrinking margins on conventional loans, increased bankruptcies among nonbank subprime lenders, and technology and financial innovation - are likely to encourage banks and thrifts to dip their toes in the subprime waters.

The FDIC's draft proposal builds on interagency guidelines issued in March. That document permitted examiners to demand additional capital from subprime lenders on a case-by-case basis. But in a November speech, FDIC Chairman Donna A. Tanoue said the agency would pursue an across-the-board rule instead.

In a reference to the March guidelines, the FDIC's draft proposal said the agency had "encountered significant drawbacks in its application." In addition to offering a "nebulous" definition of subprime, it said, the March guidelines failed to indicate just how much extra capital should be required of subprime lenders, and failed to recognize that few subprime lenders are familiar with sophisticated capital-allocation models.

Under the FDIC's proposal, virtually all types of consumer loan categories could be considered subprime, including auto, mortgage, home equity, and credit card. Depending on the nature of the borrower, small-business loans might also qualify, though so-called community development loans would be exempt.

In a preliminary critique, the consulting firm ISD/Shaw criticized the FDIC proposal, saying it prematurely declares the case-by-case approach ineffective, fails to offer evidence that subprime lending is inherently riskier than conventional lending, and could discourage lending to low-income borrowers.

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