WASHINGTON - Increasing the amount of money a bank is free to lend, federal regulators next month will reduce the capital requirement for low- level recourse arrangements.
The change answers complaints from bankers that the current rule requires them to hold too much capital.
The Federal Reserve adopted the new rule last week; the other banking agencies are expected to follow suit in coming weeks.
Low-level recourse arrangements describe a situation in which a bank sells an asset but agrees to absorb some part of any future loss. Currently, banks must hold an 8% capital reserve against the entire value of the sold asset - even when its loss is limited to 2% or 3%.
The new rule takes this reality into account, giving banks two options: They can continue holding reserves against 8% of the asset, regardless of the recourse amount, or they can hold capital reserves equal to the amount of the recourse. So if a bank had granted 3% recourse on an asset, it could hold 3% of the asset in capital reserves.
The new rule complies with a requirement in the Riegle Community Development and Regulatory Improvement Act of 1994.
The agencies have been grappling for several years with how to treat recourse arrangements. This provision and other proposals dealing with letters of credit and credit-weighting were included in a proposal the agencies released last May. The agencies have not yet addressed the other issues.
Banking advocates applauded the rule revision.
"It is certainly a move in the right direction," said James McLaughlin, director of agency relations at the American Bankers Association. "We have been working in this complex area for some time."
"It is a good thing," agreed Bankers Roundtable general counsel Richard Whiting. "It furthers the process of undoing some of the heavy regulatory requirements that were placed on banks . . ., and it does so with respect for safety and soundness."
Karen Shaw, an industry consultant and president of ISD/Shaw Inc., said the regulation would make it easier for banks to securitize assets.
The Fed has a separate proposal to reduce capital reserve requirements for certain recourse arrangements on small business loans and leases.
That proposal, on which bankers have until Feb. 27 to comment, is supposed to encourage small business lending by letting banks that sell small business loans with recourse hold less capital than if they had sold a regular loan with recourse.
The proposal only kicks in if the bank is well capitalized, treats the recourse arrangement as a sale, and establishes a noncapital reserve sufficient to meet its liability under the recourse deal.