Banks get more time to meet new capital rules

Lawmakers clinched a deal on Thursday to give big banks more time to comply with tighter capital rules and largely exempted firms with less than $15 billion in assets.

The deal, agreed to by House and Senate negotiators finalizing the landmark financial overhaul bill, would give big bank holding companies 5 years to abide by a measure disqualifying riskier securities from meeting stiffer capital standards.

The Senate unanimously voted for the new standards, sponsored by Republican Susan Collins, requiring that Tier 1 capital at bank holding companies comprise only equity and not hybrid instruments such as trust-preferred securities. Such securities are equity-like securities that also make quarterly interest payments and qualify as debt for tax purposes.

The House panel earlier voted to weaken the provision by grandfathering, or exempting, all firms that had counted the securities as assets.

Under the compromise, firms with assets of $15 billion and less could count their current holdings of trust-preferred securities as part of Tier 1, but not any new investments.

Moody's said the new deal would disqualify $118 billion in trust-preferred securities from Tier 1 treatment.

The ratings agency said disqualification of most trust-preferreds would have scant impact on their view of bank holding companies' capital positions, but said it would result in a smaller capital cushions for risk-weighted assets.

"Since a diminution of regulatory capital could broadly hurt investor confidence, reduce financial flexibility and raise funding costs, the question is how bank holding companies would respond in terms of refinancing options," analyst Barbara Havlicek noted.

Tier 1 capital is a measure of a bank's strength and is based on a core equity relative to assets. Bank capital requirements are designed to protect against potential losses.

Collins, a moderate often wooed by Democrats in the Senate, was one of four Republicans to vote for the Senate version of the legislation. As a key swing vote, Democrats may need her vote for the final bill.

The Collins idea is bly backed by Federal Deposit Insurance Corp Chairman Sheila Bair.

Banks argue the provision would lead to more bank failures and they oppose the Collins measure. Critics also say strict capital provisions should not be written in legislation, which is less flexible than rules passed by bank regulators.

Senator Blanche Lincoln, a key player in talks on regulating derivatives, had backed a higher exemption limit to give some banks from her state of Arkansas a break from new capital requirements in the financial reform bill.

Among those banks is Arvest Bank Group Inc of Bentonville, Arkansas -- a bank predominantly owned by the Walton family of Wal-Mart Stores Inc.

[Source: By Kim Dixon and Rachelle Younglai, Reuters, Washington, 24Jun10]

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