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Brown-Vitter Bill May Have Negative Ratings Impact For Banks: S&P

NEW YORK ( TheStreet) -- The new Brown-Vitter bill that proposes a new, higher capital standard for banks may have a negative impact on bank ratings if enacted, Standard and Poor's Rating Services said in a report Thursday.

The draft of the legislation introduced earlier this week proposed that banks with assets greater than $500 billion raise capital levels to at least 15% of total assets (including off-balance sheet items), with regional banks with assets in the $50 billion to $500 billion range required to have a minimum of 8%.

The bill attempts to offer a simpler, yet harsher alternative to the Basel III capital rules for banks, which is now the internationally agreed standard.

Basel III requires the large banks to hold a minimum of 7% in common equity capital, while the too-big-to-fail banks are required to hold an additional buffer of up to 2.5%, depending upon their size and complexity. JPMorgan Chase (JPM - Get Report) and Citigroup (C - Get Report) will need to hold 9.5% under Basel III for instance, while Bank of America (BAC - Get Report) will need to hold 8.5% and Wells Fargo (WFC - Get Report) will have to hold 8%. Those capital requirements are considerably lower than what the new bill proposes.

Moreover, Basel III follows a risk-weighted capital approach, requiring banks to hold more capital against risky assets, such as junk bonds. The Brown-Vitter bill does away with risk weights, arguably in response to critics of the Basel rules who believe the risk weights are arbitrary.

While the higher capital adequacy would, in theory, reduce bank riskiness, "rating implications would likely be neutral to negative for those banks the bill affects," S&P said. "A possible economic downturn is likely to more than counteract the positive impact from higher capitalization. In addition, banks' franchises could weaken as a result of fewer sources of revenue, and they could engage in more risk-taking because of less focus on risk-weighted capital charges."

The analysts are worried that the transition period of 5 years to adapt to the new requirements is too short under the proposed bill. Banks would have to raise $1.5 trillion in capital under the new standards, according to the report.
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