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Regulators Double Basel III Capital Requirement (Update 1)

Updated with afternoon market action and further detail on the enhanced capital requirements.

NEW YORK ( TheStreet) -- One week after federal regulators issued their "final" rules for implementing Basel III capital requirements, the regulators on Tuesday proposed doubling a key requirement for the nation's largest banks.

The Office of the Comptroller of the Currency on Tuesday announced that along with the Federal Reserve and the Federal Deposit Insurance Corporation, it had proposed "to add a 6 percent supplementary leverage ratio requirement to the 'well-capitalized' capital category to their respective prompt corrective action regulations for any covered insured depository institution."

The 6% minimum Basel III supplementary Tier 1 leverage ratio requirement will apply to banks with total assets of more than $700 billion. The largest bank holding companies will be required to maintain Basel III Tier 1 leverage ratios of at least 5%.

The regulators' supplementary leverage ratio requirement is completely separate from the final Basel III Capital Rules published last week by the Fed, the OCC and the FDIC. Under those rules, the Basel III Tier 1 leverage requirement for all banks is 4%. But "advanced approaches" banks are required to do a separate Tier 1 leverage capital ratio calculation, incorporating off-balance-sheet items. The minimum requirement for this supplementary Tier 1 leverage ratio is just 3% under the final rules announced last week.

But the Federal Reserve Governor Daniel Tarullo said in a statement that "despite its innovativeness in taking account of off-balance-sheet assets, the Basel III leverage ratio seems to have been set too low to be an effective counterpart to the combination of risk-weighted capital measures that have been agreed internationally." He also said "we are very close to completion of a notice of proposed rulemaking that will establish a leverage ratio threshold for these firms above the Basel III required minimum."

It sure didn't take long for the regulators to propose the higher capital requirement, but it is a confusing event for investors, who would like to see the capital requirements settled at some point.

"The regulators want to make sure that the large-cap banks don't get too comfortable with where their capital requirements are," says Guggenheim Securities analyst Marty Mosby. "This leaves some uncertainty out there to encourage them to be more conservative in their deployment of capital."

The latest move on capital requirements may also soothe some members of Congress, who have been calling for a simpler approach to banks' capital requirements.
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