Wednesday, August 08, 2012

US Senators Urge Fed to Scale Capital Requirements under Dodd-Frank to Systemic Risk Posed by Financial Institution

In a letter to Fed Chair Ben Bernanke, Senators Sherrod Brown (D-OH) and David Vitter (R-LA), both members of the Senate Banking Committee, urged the Federal Reserve Board to revisit the proposed rules on capital standards and better align capital requirements to the systemic risks posed by the financial institution. Modifying the proposed rule and requiring the biggest banks to have stronger capital reserves would help preserve the safety and soundness of the financial system, the Senators asserted, and will help ensure that megabanks are no longer too big to fail or will require another taxpayer bailout.

Section 165 of the Dodd-Frank Act authorizes the Fed to set enhanced risk-based capital requirements and leverage limits for the largest banks and financial institutions. The Fed’s proposed regulations implementing enhanced prudential standards states that the capital surcharges for Systemically Important Financial Institutions (SIFIs) would be based on the Basel Committee on Banking Supervision framework, also known as Basel III. 

The Senators noted that Section 165 also authorizes the Board to differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Board deems appropriate. In addition, the Senate Committee Report accompanying the Act clarified that the standards and requirements must increase in stringency as appropriate in relation to certain characteristics of the company, including its size and complexity.

The proposal requests input regarding the appropriate scope of application for a SIFI capital surcharge, and Senators Brown and Vitter noted that all SIFIs are not created equal, and, when crafting capital surcharges in accordance with Basel III and Section 165 of Dodd-Frank, the Board should keep in mind the distinctions between money-center banks and regional banks. Systemic risk capital buffers should be imposed based upon the actual risks posed to the system, they reasoned, not merely in response to designation as a SIFI.

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