Fed Proposes Zero Reserve for Some Collateralized Loans

The Federal Reserve Board proposed Wednesday to drop the capital requirement for some loans secured by cash or government securities.

The three other banking and thrift regulators are expected to issue similar proposals soon. The new rules would replace separate risk-based capital rules each agency has for collateralized loans.

Under the prospective policy, the lender and borrower would agree in advance what percentage of the loan would be collateralized and thus qualify for the zero-reserve requirement. The bank, however, would continue to hold reserves against the portion of the loan not collateralized.

The bank would have to check the collateral's worth daily to make sure it was not losing value. If its value declined, the bank would require the borrower to post more securities or cash. The process is analogous to a margin requirement for stocks.

The Federal Deposit Insurance Corp. and the Office of Thrift Supervision currently require banks to hold reserves against 20% of a collateralized loan's value. The proposal would have a lesser effect at the Comptroller's Office and the Fed, which don't require reserves on the collateralized portion of a loan.

The proposal should be published shortly in the Federal Register.