Delay seen in implementing U.S. bank capital rules

U.S. banking regulators do not expect proposed rules requiring financial institutions to hold more capital to take effect on January 1, as regulators work through a flood of industry comments on the proposals.

Regulators have received more than 2,000 comment letters since the rules were proposed in June to implement the international agreement on bank capital known as Basel III.

The agreement is considered one of the most critical reform efforts to make sure the global banking system is more resilient in the aftermath of the 2007-2009 financial crisis.

"We have received a large number of comments and want to closely consider each issue," Federal Reserve Board Governor Elizabeth Duke told a group of community bankers on Friday.

The Fed, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency said in a statement on Friday that tougher capital requirements would be delayed beyond January 1.

They did not indicate when they plan to finalize the proposed rules.

The delay adds to concerns that international agreements on financial reforms are fraying, as policymakers cope with strong industry pushback and disagreements with foreign counterparts about the best approach to reduce risk in the financial system without stifling economic growth.

Under the proposed rules, which were to be phased in over six years, banks would have to hold about three times more basic capital to protect against potential losses. The biggest banks would hold even more. The amount of reserve capital that banks must hold would be determined, in part, by the riskiness of their assets.

Banks have agreed that they need to hold more capital to guard against losses, but have criticized the particulars of the proposed rules.

Large banks say the rules go too far in forcing them to hold extra capital. Smaller banks have argued that extra costs to comply with the rules could hurt their ability to lend, stifling the U.S. economic recovery.

Many in the industry have said the rules, particularly the formulas used to determine how much capital to hold for riskier assets, are much too complicated. Some regulators have proposed exempting smaller banks from that portion of the rules, while others have suggested throwing out the rules entirely in favor of a simpler plan.

A bipartisan group of 53 lawmakers asked regulators in September to consider whether community banks should have to comply with the new standards.

Karen Petrou, managing partner of consulting firm Federal Financial Analytics, said observers expect community banks will have to hold more and higher-quality capital but not follow the same risk-weighting models larger banks will use.

Officials from the three bank regulators will appear before a U.S. Senate committee hearing next week focused on the impact of the proposed rules.

NEED MORE TIME

Industry groups also have said the January effective date would not give institutions, especially community banks, enough time to comply with the rules.

Regulators had already extended the comment deadline to give firms more time to determine how the requirements would impact their businesses.

"Even if they published the rule today, there's no way they could give enough time for anybody to comply for a January 1 deadline," said Wayne Abernathy, head of regulatory affairs at the American Bankers Association.

"Everybody's recognizing that this is important stuff, you've got to take the time to get it right," he said.

Implementation of the last set of Basel rules - Basel II - was plagued by delays, especially in the United States, and some observers have worried that the new rules could face the same obstacles.

Petrou said she thinks there is enough support in the United States for tougher capital standards that the Basel III requirements will be implemented in some form.

"I think something like the Basel III rules will go into effect in the United States no matter what, even if the global agreement, which is very fragile, falls apart," she said.

"There's not, in my opinion, any chance that this delay means a return to the old rules, it means only that the new ones will be phased in on a somewhat more merciful schedule."

European banks are even farther away from complying than their U.S. counterparts, prompting speculation that the timetable will have to be eased.

Some international regulators have hinted that pressure or additional punishments could be in store for countries that are "delinquent" in implementing the rules.

(Reporting By Emily Stephenson; Editing by Gerald E. McCormick and Leslie Adler)