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New bill would eliminate Basel III and raise bank capital

May 30, 2013 by Jim Ghiglieri — Senior Vice President, Corporate Communications, SHAZAM

To put an end to the too-big-to-fail phenomenon, Senators Sherrod Brown and David Vitter recently introduced the "Terminating Bailouts for Taxpayer Fairness Act of 2013" bill.

While the bill focuses on large financial institutions, it also contains several provisions that would affect smaller FIs.

The bill employs four mechanisms to address too-big-to-fail:

1. An 8-percent leverage requirement for FIs with more than $50 billion in consolidated assets, with a 7-percent surcharge for FIs with assets of more than $500 billion.
2. Application of these requirements to each of the affiliates and subsidiaries of these FIs (with certain exceptions).
3. Ring-fencing in the form of a ban on credit and certain other transactions between any depository institution with total consolidated assets of $50 billion or more and any of the institution's affiliates.
4. Broad prohibition on most forms of government support to any entity that is not an insured depository institution.

The bill would also bring U.S. participation in Basel III to an end, and marginalize if not eliminate risk-based capital requirements. Interestingly, however, the bill imports a few concepts from Basel III and the risk-based rules into the leverage ratio calculation.

Community FIs may be affected by two of these changes — revisions to the elements of capital now used to calculate the leverage ratio and the end of Basel III — as well as by other provisions in the bill that address balloon payment mortgage loans, privacy, and small business data collection.

Below are some of the specific changes in the bill:

• Leverage ratio — The bill would change all three elements of this capital requirement. Although the numerical leverage requirement would remain the same for community FIs, the changes to the numerator and denominator would result in ratios different from those now reported.
• Basel III — The bill would abandon Basel III, including the pending regulatory capital proposals that were issued in June 2012.
• Risk-based capital — The bill de-emphasizes risk-based capital to the point that regulators must justify risk-based capital rules as something outside the mainstream of FI regulation.
• Community FI provisions — The bill includes several provisions to address specific community FI concerns.

Read a draft of the bill in its entirety.

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