Monday, June 27, 2011

Citing Basel Committee Action, Members of House Financial Services Committee Caution on Raising Bank Capital Requirements

Noting that the Basel Committee is contemplating raising the capital level for global systemically important financial firms, three members of the House Financial Services Committee urged US regulators to carefully consider the impact of any Basel actions on the US economy. In a letter to Treasury and the Fed, Rep. Nan Hayworth (R-NY), Rep. John Carney (D-DE), and Rep. James Renacci (R-OH) said that it is crucial that US policymakers carefully examine and weigh the cumulative impact on credit availability and overall recovery efforts before considering additional surcharges for US financial institutions.

On June 25, 2011, the oversight body of the Basel Committee agreed on a consultative document setting out measures for global systemically important banks, including required capital ranging from 1 percent to 2.5 percent, depending on a bank's systemic importance. This builds on the Basel III requirements of holding a capital conservation buffer of 2.5 percent to withstand future periods of stress bringing the total common equity requirements to 7 percent.

The Representatives noted that the Basel proposal is on the heels of the December 2010 proposal to triple capital levels, which is an action that would require banks to add more than $600 billion in capital to their balance sheets. While recognizing that prudent capital standards can increase safety and soundness, the Representatives said that unnecessarily high capital surcharges on top of Basel III and other reforms could place an untimely drag on the recovery. Also, they said that the new capital requirements must be implemented consistently cross-border to provide a level playing field for US firms and international counterparties.

Finally, noting the Dodd-Frank reforms addressing systemic risk and interconnectedness of firms, the Representatives said that the Basel Committee has not yet demonstrated that revised capital levels are necessary in the wake of all the other reforms implemented since the crisis.