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Fed raises cushion requirements for banks

July 2, 2013 at 5:04 PM   |   Comments

WASHINGTON, July 2 (UPI) -- The U.S. Federal Reserve Tuesday issued new capital requirements for banks that it said would comply with Basel II agreements and make banks safer.

The Fed said the final rule on capital requirements, addressing both quantity and quality of capital held by banks, will bring regulations into compliance with aspects of the Dodd-Frank Wall Street overhaul bill.

The requirements are intended to provide as large a cushion as possible against future economic downturns, so banks in trouble do not have to turn to taxpayers to bail them out.

The Fed said it will increase the minimum ratios of common equity tier1 capital to risk-weighted assets, investments assigned different values depending on their potential to show a profit or go into default.

"Adoption of the capital rules today is a milestone in our post-crisis efforts to make the financial system safer," said Fed Gov. Daniel Tarullo in a statement. "Along with the stress testing and capital review measures we have already implemented, and the additional rules for large institutions that are on the way, these new rules are an essential component of a set of mutually reinforcing capital requirement."

Fed Chairman Ben Bernanke said the rules require banks "to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks."

"With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy," he said.

The Fed said banks will have a long grace period before the new requirements would be enforced.

Regional banks would have until January 2015 to phase in the higher cushions, while larger institutions would need to begin phasing them in in January 2014, the Fed said.

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