WASHINGTON - Federal regulators on Tuesday unveiled a highly anticipated proposal that would simplify capital requirements for small banks, and they assured executives that most of their institutions would qualify.

"This proposal would affect nine out of every 10 banks in the country and reduce the regulatory burden for those institutions without compromising safety and soundness," Federal Deposit Insurance Corp. Chairman Donna Tanoue said before the agency's board approved it. This plan "contains ideas whose time has come."

Industry officials praised the proposal, which was simultaneously approved by the Federal Reserve Board. The Office of Thrift Supervision and the Office of the Comptroller of the Currency are expected to sign off on it within two weeks.

"Community banks have found the risk-based capital rules an unnecessary complexity since they were imposed in 1988," said James D. McLaughlin, director of regulatory affairs at the American Bankers Association. "The real impact of risk-based capital on community banks has been more regulatory burden and much longer and more complex call reports. This is a very important first step."

The proposal, which tracks the outline Ms. Tanoue sketched in a speech last month, would let "noncomplex institutions" operate under simpler risk-based capital standards than larger institutions.

One of the major questions in recent weeks had been how inclusive regulators would make that definition.

Under the proposal, a noncomplex institution would have less than $5 billion of assets and a simple, low-risk balance sheet that would include, for example, primarily traditional and nonvolatile assets and liabilities. Only a minimal use of derivatives would be permitted.

The agency calculated that, under those parameters, 8,035 banks and thrifts controlling about 20% of the industry's assets would qualify.

The public will have 90 days to comment on the proposal, which is expected to be published soon in the Federal Register.

Reaction is expected to be positive.

America's Community Bankers senior regulatory specialist Michael W. Briggs hailed the proposed simplified capital standards for community banks in a statement. "This is especially important at a time when U.S. and international regulators are considering allowing banks with complex operations to use internal systems in determining their own risk for risk-based capital purposes."

This initiative is "critical in order to recognize the differences in banks based on their size, risk, and complexity," Independent Community Bankers of America director of regulatory affairs Karen M. Thomas said in a statement. "Refinements to the current risk-based capital rules being considered in the international arena are simply inapplicable to the vast majority of community banks."

The proposal detailed three options under consideration: a standard capital-to-assets leverage ratio, a simplified risk-based ratio, and a modified leverage ratio that includes a risk-based element.

Under the first alternative, regulators would use a simple leverage ratio to determine capital requirements for community banks. The second option would make the risk-based capital standards simpler for community banks by having fewer risk categories, less complex calculations or fewer reporting requirements. The third would combine the best elements of both approaches, using a modified leverage ratio that addresses off-balance-sheet risks.

Existing rules require all banks and thrifts to meet two minimum capital standards: a capital-to-assets 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%.

Some of the questions financial regulators are considering include whether current capital risk standards pose an undue burden for small institutions and whether they should be revised to put them more in line with expected revisions to the 1988 Basel Accord.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.