New Fed Rules Require Banks to Increase Financial Cushion

Chip Somodevilla/Getty Images(WASHINGTON) — The Federal Reserve proposed new rules Thursday that require banks maintain stronger capital buffers to protect themselves against potential losses.
 
The rules call for large banks to hold six percent of their assets in capital reserves, compared to the current requirement of four percent. The proposed rules additionally finalize market risk capital requirements through the implementation of Basel 2.5.
 
“Capital is important to banking organizations and the financial systems because it acts as a financial cushion to absorb firm losses while reducing the incentive for firms to take excessive risks,” Ben Bernanke, chairman of the Federal Reserve, said at a meeting of the Federal Reserve Board of Governors. “With these proposed revisions to our capital rules, banking organization’s capital requirements should better reflect their risk profiles leading to improved resilience in the U.S. banking system in times of stress and thus contributing to the overall health of the U.S. economy.”
 
Federal Reserve Gov. Daniel Tarullo lauded the proposed rules, saying they “mark an important milestone on the road to a set of strong complimentary capital standards for banking organizations.”  Tarullo said that, generally, “pre-crisis capital requirements had been too low” and stressed the importance for banking institutions to have strong capital buffers in place.

“Banks with a strong capital provision can absorb losses from unexpected sources, whether an external shock to the economy, the insolvency of important counter parties or a failure of risk management within the firm. Strong capital buffers help ensure that losses are born by shareholders of the bank not by taxpayers,” Federal Reserve Gov. Daniel Tarullo said.  “Uncertainty about the capital positions of large financial firms was a major factor in the turmoil that beset the country in the fall of 2008.  The subsequent increases in capital at our major banks along with the information provided by the stress tests in 2009 were important factors in stabilizing the system.”

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