Fed issues tougher capital rules towards safer financial system

The Federal Reserve is working on a plan to make banking system safer. The financial institution is going to force banks to comply by the new Basel III capital regime in January next year. The tougher rules were criticized by many bankers one of them being Jamie Dimon of JP Morgan Chase who defined the new rules as “anti-American”.

The Basel III agreement obliges banks to hold a minimum of 7% equity against risk-weighted assets phased in over five years. Although it cant be compared to the previous policy, analysts translate it as it would more than double the amount of capital required for banks, making them more resilient during a crisis.

Cited by Financial Times Ben Bernanke, Fed chairman, explained: “Critically, this framework requires banking organisations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks.”

Dan Tarullo, Fed governor responsible for regulation, stated intentions to go even further, making US banks comply to a stricter “leverage ratio”, a measure of equity to total assets favored by policy makers as a simpler metric that is difficult to be evaded by banks.

Several proposals for bank safety have been noted one of which is to force banks to hold a minimum amount of debt to be converted to equity during a crisis in order to recapitalize them.

“This gives us a firm position from which to press our expectations that other countries implement Basel III fully and faithfully, thereby promoting global financial stability,” Mr Tarullo said for Financial Times commenting on the new banking policies to be implemented.

The Fed has been pressured by policy makers such as Angela Merkel, the German chancellor, and Michel Barnier, the European commissioner, to implement the global Basel III standards, created to make banks more resilient in a crisis.