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Fed Chairman Ben Bernanke said the new rules reduce “the incentive for firms to take excessive risks.”

Susan Walsh • Associated Press file,

Federal Reserve's new banking rules are just the beginning

  • Article by: Danielle Douglas Washington Post
  • July 2, 2013 - 7:30 PM

- The Federal Reserve Board on Tuesday ordered banks to set aside more capital as a cushion against losses, bringing the United States in line with developing international standards and opening the door for a set of tougher rules for the nations biggest financial institutions.

Almost all banks already meet the requirements the board unanimously approved Tuesday, but the new capital rules are only the beginning.

Fed Governor Dan Tarullo said the board plans to issue four proposals in the coming months to ratchet standards up even higher for banks deemed “systemically important,” including JPMorgan Chase and Goldman Sachs.

Targeting risk

Those proposals, coupled with the new capital rules, could force megabanks to reduce their size and complexity to remain profitable. The Fed’s approach gets to the heart of the “too-big-to-fail” problem by limiting the risks big banks can pose to the financial system, and ultimately taxpayers, if they collapse.

Financial-industry officials have argued that the new standards could work against government efforts to promote economic growth. The big bank trade groups did not returns calls for comment.

The Fed’s vote brings the United States closer to enforcing a 2010 international agreement by a committee of central bankers and regulators operating out of Basel, Switzerland. The Basel committee’s recommendations were meant to make the global banking system more resilient in times of financial upheaval by forcing banks to sock away more money.

Instituting those proposals, however, has been a slow process. The Fed’s final plan reflects the tension in the United States between the financial stability that regulators are trying to achieve and their desire not to disrupt the economic recovery.

Chief among the final rules is a requirement that all banks hold a minimum of 7 percent of assets in the form of common equity, considered the best buffer against a downturn.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are scheduled to vote on the final draft next Tuesday. Banks must start phasing in the rules in January but have five years to complete the transition.

“This framework requires banking organizations to hold more and higher quality capital … while reducing the incentive for firms to take excessive risks,” Fed Chairman Ben Bernanke said. “Banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”

Win for smaller banks

The rules represented a win for regional and community banks, which lobbied for exemptions because they did not cause the financial crisis and are a critical source of funding for small businesses.

Regulators capitulated by chucking an extensive mortgage proposal that would have forced community banks to raise more capital. The Fed staff said it backed off the proposal to examine the impact of other new mortgage rules.

Small and midsize banks also won the option to opt out of having to count certain types of income in capital calculations.

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