The Federal Reserve has agreed to adopt an international banking agreement designed to cushion large financial institutions against economic turbulence.
The rules, known in market circles as the “Basel III” accord, were designed in response to the 2008 economic crisis and would require banks to keep capital buffers of a certain size in their coffers as insurance in the event of a downturn. These regulations are tiered according to the risk associated to certain assets: For example corporate debt is considered more dangerous than US bonds.
Basel III also includes measures that would establish limits on executive bonus payments if they do not meet the rules.
The decision was reached by a unanimous vote of the Fed’s board of governors, with Chairman Benjamin Bernanke presiding.
“Capital will act as a financial cushion to absorb future losses,” Bernanke said. “Strong capital requirements are essential if we hope to have safe and sound banks.”
The rules will need approval from both the FDIC and Treasury’s currency comptroller office before official implementation; Treasury intends to sign off on the guidelines next week.
According to the nation’s central bank, 95 percent of holding companies with over $10 million in assets will meet the buffer threshold designated for the largest of institutions: 7 percent in equity. However some members of congress, from both parties, have pushed for an even higher buffer of 15 percent.
One major change between today’s rules and a proposal forwarded last year is it eases compliance standards for small lenders. While the US banking industry as a whole has been relatively restrained in criticism for the stronger regulations, some small lenders, such as community banks, have lobbied to be outright exempt from compliance with Basel III as they did not contribute to the 2008 downturn.
The US is one of 27 countries on the Basel Committee on Banking Supervision, which originally proposed the rules in 2010.