Fitch: Fed-Proposed Bank Rules Underscore Challenges Banks Face

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings says the Federal Reserve Tuesday released its proposal package mandated by the Dodd-Frank Act. Fitch has previously stated its view that the long-awaited set of rules were devised to establish a financial foundation better protecting banks against failure should another crisis arise.

The proposed rules apply to banks with more than $50 billion of consolidated assets along with nonfinancial firms deemed "systemically important" by the Financial Stability Oversight Council. We believe that, while the majority of the proposal contains no surprises, regulatory reform remains a challenge for banks. Firms would have to comply with the new set of standards one year after they are finalized.

As expected, the 173-page package addresses enhanced capital and liquidity requirements. Banks will need to comply with the Fed's stress-test plan released in November requiring firms to prove they can meet a Tier I risk-based capital ratio greater than 5% during bouts of volatility. The internal stress tests are to be performed annually, and firms will be required to set internal quantitative limits to manage that risk.

Banks will now be subject to a risk-based capital surcharge expected to be between 1% and 2.5%, although the Fed proposal did not include specific requirements and is instead waiting for the Basel Committee on Banking Supervision to release its global buffer requirements before discharging its US risk-capital conditions. Eight US banks appear on Basel's list of 29 globally systemically important financial institutions (G-SIFIs). Savings and loan companies are exempt from most of the new proposals, but will be required to adhere to the Fed stress-test requirements.

Fitch continues to believe that excess capital requirements will be broadly manageable by US banks, all other things being equal. Notwithstanding, Fitch will need to give consideration to the proposal that banks must limit their exposure to single counterparties.

Under the proposal, banks must now limit credit exposure to a single counterparty as a percentage of the firm's regulatory capital. Credit exposure between banks will also be subjected to a tighter limit. Institutions with greater than $500 billion in assets would be limited to a 10% exposure with a counterparty bank.

Fed officials are accepting industry comments on the proposal through March 31, 2012.

Additional information is available on www.fitchratings.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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