The Deal: Fed Holds Line on Basel III Rules

NEW YORK ( TheDeal) -- The Federal Reserve Board on Tuesday, July 2, approved a final rule implementing international regulatory capital reforms recommended by the Basel Committee on Banking Supervision as well as some changes required by the Dodd-Frank financial reform act.

The unanimously approved rules are meant to ensure that banks maintain capital positions sufficient to let them continue lending after unforeseen losses and through severe economic downturns. The rules contain substantial changes from a version proposed last summer, which were made to minimize the burden on smaller, less complex financial institutions.

The most burdensome rules will primarily affect JPMorgan Chase ( JPM), Citgroup ( C), Bank of America ( BAC), Wells Fargo ( WFC), Goldman Sachs ( GS), Morgan Stanley ( MS), Bank of New York Mellon ( BNY), and State Street ( STT). Many of the tougher rules also might apply to U.S. Bancorp ( USB), Capital One Financial ( COF), and PNC Bank ( PNC). General Electric's ( GE) GE Capital Corp. is also likely to be subjected to the rules when they are set for oversight of systemically important nonbank financial firms.

The Fed also made clear that the largest, most complex banks will in a few months also face additional capital rules, a higher leverage ratio, a long-term debt requirement and a surcharge for wholesale funding.

The rules make some important deviations from the Basel III guidelines, as do individual capital regimes that have been implemented on several European guidelines. The Basel Committee is expected to review the various national rules to gauge how closely they adhere to Basel III.

According to Federal Reserve members and agency staff, the final rules minimize the burden on smaller, less complex financial institutions, while establishing an integrated regulatory capital framework for institutions large and small. The rules are meant to address shortcomings in capital requirements, particularly for large international banking organizations that contributed to the 2008 financial crisis.

"This framework requires banking organizations to hold more and higher-quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks," Fed Chairman Ben Bernanke said as he opened a meeting veiling the rules. "With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy."

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