In an effort to enhance lending to worthy households and businesses, the Federal Reserve Board (“Fed”) approved a final rule on July 2, which would implement more stringent regulations on banks to ensure they maintain strong capital positions. This came to fruition as a result of large financial institutions’ failures caused by the recent recession in the United States.
The rule focused on establishing framework for larger, international banks that will be subject to more rigorous capital requirements that had been observed during the recent financial crisis. Additionally, the language aims at minimizing the burden on smaller financial institutions. The Fed released a one page summary of how the rule will impact smaller banks. The rule will also implement the global agreement, known as Basel III, which will place limits on larger financial institution’s capital distributions and bonus payments if the bank is ill-equipped with specific equity buffers in order to avoid collapse. Certain provisions from the Dodd-Frank Wall Street Reform and Consumer Protection Act were also incorporated in the rule.
The final rule will increase the minimum capital requirements for larger financial institutions, in both quantity and quality. Ben Bernanke, Chairman of the Federal Reserve, stated, “Capital will act as a financial cushion to absorb future losses…strong capital requirements are essential if we hope to have safe and sound banks.”
Implementation of the rule will be in two phases; larger financial institutions must begin implementing the provisions in January, 2014, and the smaller, less complex banks will begin on January, 2015.
The full document is 972 pages in length and you can read it here.