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Bank Capital Standards: Who's on First?

WASHINGTON ( TheStreet) -- You'll have to forgive the banking industry for not quite knowing how much capital it's supposed to have.

Before the fall of 2008, policies of the industry's three regulators -- the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury -- were consistent in being collectively lenient and individually disparate. Now they're consistent only in being vague, even if the same rules remain on the books.

Though new standards won't be unveiled until the the Basel Committee on Banking Supervision comes to an agreement, a proposal by Sen. Susan Collins (R., Maine) would strengthen the implementation of those rules and thwart possible loopholes.

Oddly enough, Collins is meeting backlash not just from the industry but from two regulatory agencies. I'll get to how their ideas differ, why it matters and what may come of the reform, but first let me explain the Gordian knot of bank regulation and how the three entities are involved.
Susan Collins/Sheila Bair
Sen. Susan Collins (left) has proposed strict new regulations on capital as part of the financial reform bill, and she's got the backing of FDIC Chairwoman Sheila Bair (right).

One might think that a bank is just a bank, but that isn't so. There are banks and thrifts, their holding companies and non-bank financial institutions that operate in the same markets as banks. The FDIC oversees banks, the Fed oversees bank holding companies, and the Treasury has oversight of everything thrift-related, though not for long.

>>>5 Banks That Might Get Burned by Reform

Under the proposed financial reform bill, the Fed will take over supervision of the holding companies, while the Treasury will shift responsibility for thrifts from the Office of Thrift Supervision -- which is being expunged -- to its other bank-regulatory agency, the Office of the Comptroller of the Currency. Non-bank firms -- like insurers that are regulated by state agencies, or others like hedge funds and private equity firms that are barely regulated at all -- will also belong to the Fed.

Got all that? Good.

The three agencies each set their own capital adequacy guidelines, though the Fed's are generally considered to be the rule of thumb: A 10% ratio of capital-to-risk-based assets; a 6% ratio of Tier 1 capital-to-risk-based-assets; and a 5% leverage ratio makes for a well-capitalized bank.
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