Bank capital regulation has been at the forefront of recent financial regulatory reform efforts in the United States and abroad. Section 165 of the Dodd‐Frank Act specifically calls on the Federal Reserve Board (FRB) to establish heightened capital and leverage requirements for bank holding companies with over $50 billion in assets and FSOC‐designated nonbank systemically important financial institutions (SIFIs).

The FRB’s Proposed Rule

The FRB’s proposed rule implements Section 165’s capital provisions in two ways. First, it requires nonbank SIFIs to comply with the FRB’s capital planning rule, effective since December 30, 2011 for large banks. Under the capital planning rule, covered companies must maintain a Tier 1 common equity ratio of 5%. Additionally, covered companies must submit a capital plan” to the FRB each January, to include the expected uses and sources of capital over the next nine quarters and a roadmap explaining how it will continue to meet the 5% minimum ratio. The proposed rule would also require nonbank SIFIs for the first time to calculate their risk-based capital and leverage requirements as if they were bank holding companies.

Second, the FRB stated its intention to implement the Basel Committee’s global‐systemically important bank (G‐SIB) capital surcharge in 2014, which could require some of the largest bank holding companies to hold an additional 1% to 3.5% in Tier 1 common equity. The exact
surcharge amount would be decided using a set of quantitative indicators that will group banks into graduated surcharge buckets.

Regulatory Capital

Capital represents the portion of a bank’s liabilities that does not have to be repaid (like common equity and retained earnings) and therefore is available as a buffer should the value of the bank’s assets become lower than the value of the bank’s other outstanding liabilities, such as consumer deposits and debt.

Bank supervisors in every country specify “regulatory capital” levels, which include rules for the types of financial instruments that qualify as capital and the required capital ratios banks must maintain. In these ratios, total capital is the numerator and risk‐weighted assets are the
denominator. To account for the different levels of risk associated with individual asset types, regulators rely on the concept of “risk‐weighting,” where asset values are multiplied by an associated percentage depending upon risk. The riskier the asset the greater the risk weight, and a bank will ultimately have to hold more capital to meet its required regulatory capital ratio.

Next, The Clearing House will examine the liquidity components of Section 165 and their relationship to the new Basel liquidity rules.

The Clearing House is the nation’s oldest banking association and payments company established in 1853 to bring order to clearing and settling between banks.

For more information see theclearinghouse.org/issues/banking-regulations/dodd-frank.