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Changing Basel and FDIC Rules Present Challenges for US Banks


All banks, regardless of size, face tougher capital rules to comply with the new Basel III international banking regulations.

They have plenty of time to comply as higher capital requirements do not take effect until 2019.

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In addition, under Dodd-Frank, the Federal Deposit Insurance Corp.'s insurance fund must be funded to 1.35% of insured deposits by Sept. 30, 2020.

The Basel III international accounting rules were designed to cushion the banking system from another wave of potential losses, which are possible should the US economy fall prey to another round of bad loans or other financial stresses.

After all, the US economy remains in the "Great Credit Crunch" that began at the end of 2007.

Under the new Basel III rules, a bank must maintain common equity equal to 4.5% of risk-based capital and another 2.5% as a capital reserve just in case of an emergency. The sum total of 7% is a significant increase as current standards are as low as 2%.

These proposed rules went beyond what bankers anticipated. Smaller community and regional banks expected that these regulations would not apply to them, but the program is "one-size-fits-all."

There are many small community banks that will face a financial bind when attempting to comply with these requirements.

Banks with $50 billion or more in assets face additional scrutiny, particularly those with significant trading activity. There will be multiple levels of additional capital to protect against systemic risks to cover the risky trades in over-the-counter derivative contracts. Banks with more than $100 billion in assets likely will have higher capital requirements and additional disclosure requirements.

When you look down the list of 7,307 FDIC-insured financial institutions, you find 1,366 community and regional banks with assets of more than $500 million. There are 5,941 banks with assets of less than $500 million.

Banks with assets of less than $500 million will likely find it extremely difficult to comply with the Basel III rules.

Many of these community banks have been trying to raise capital just to get back to within the regulatory guidelines for commercial real estate loans, but they have had difficulties doing so in the current economic environment.

A separate report from Fitch Ratings estimated that the world's largest banks will have to come up with an additional $566 billion in capital to meet the Basel III requirements. That's almost as big as the $700 billion Troubled Asset Relief Program in the US.

Keep in mind that TARP remains on the financial field of play. The amount outstanding as of June 11, according to, is $212 billion. If you take out the $146 billion owed by Fannie Mae (FNMA) and Freddie Mac (FMCC), the $27.2 billion still owed by General Motors (GM), and the $29.1 billion owed by AIG (AIG), what's left is $9.7 billion owned by 434 community banks that received TARP money. Of these, 200 have missed at least one TARP dividend payment as of March 31.

The factors affecting community banks will lead to further consolidation in this industry including additional failures right through 2020.

Another tax on the banking system is funding the FDIC Deposit Insurance Fund. Under Dodd-Frank, the DIF must be expanded to 1.35% of insured deposits by Sept. 30, 2020.

The current reading is an anemic 0.22%. If this rule were in effect today, the fund would have to be at $94.9 billion vs. the current $15.3 billion. If insured deposits rose to $10 trillion by Sept. 30, 2020, the fund would have to be $135.0 billion.

Where will the DIF funding come from? Increased assessments on banks with $50 billion or more in assets, with larger assessments for banks considered "too big to fail." The "Great Credit Crunch" will continue through this process.

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