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DLGpc Cautions Clients that Bank Capital Demands Could Tighten Loans

DLGpc Cautions Clients that Bank Capital Demands Could Tighten Loans

Federal Reserve Governor, Daniel K. Tarullo, a Georgetown University Law Professor appointed to the Federal Reserve, on January 28, 2009, for a term ending January 31, 2022, cautioned capital requirements for large banks may be dramatically increased in the near future.

Speaking at the Peter G. Peterson Institute for International Economics at Washington, DC, on June 3, 2011, Mr. Tarullo commented on requirements of the Dodd-Frank Act’s requirement that the Federal Reserve Board establish special prudential standards for “systemically important financial institutions,” large banks.

Mr. Tarullo focused on issues surrounding regulation of large banks. He underscored what he sees is at stake and said that, despite a cacophony of political discord, he could discern no support for another PARP program.

Mr. Tarullo laid out a rationale for enhanced capital requirements. He noted that a congressional committee on banking supervision had agreed on capital regulation reforms which will require that banks have more capital, improved risk waitings, higher minimum capital ratios, and a capital conservation buffer which will comprise a key component of the post-crisis reform agenda.

He noted these items are designed to regulate fine points in capital requirements, but that a “macro prudential perspective on capital requirements” must be adopted to “compliment the micro prudential orientation of Basel III.”

Translated, this central bank, advanced in economics language, simply means that large banks are going to have to need significantly increased capital requirements to operate. Seven percent (7%) capital will no longer be sufficient. Increased stringency standards are expected to require greatly increased, and perhaps doubling, the seven percent (7%) criteria to fourteen percent (14%). Initially, these reforms, if implemented as Mr. Tarullo foretold, will apply to “all bank holding companies with more than $50 billion in assets.”

There is more than simply an enhanced capital requirement involved. It is a substantial imposition. But, Mr. Tarullo indicated that “an advanced requirement” will mean that “high-quality capital” will be involved. He said, “Our presumption is that this means common equity, which is clearly the best buffer against losses and is what markets focused on during the crisis when evaluating the viability of financial firms.”

Mr. Tarullo said he expects US standards to be congruent with international banking standards. He described a multi-part methodology for capital requirement calculations and ran through objections to the requirements.

Mr. Tarullo offered no specific comments about the amounts of enhanced capital likely to be required. Mr. Tarullo’s speech was cited in the Wall Street Journal, New York Times, and other major US publications. The Wall Street Journal described the speech as indicating the Federal Reserve System is considering an increase in minimum capital requirements from eight percent (8%) to fourteen percent (14%).

What Does This Mean to DLGpc Clients?

DLGpc clients must be aware of these changes. Many Nebraska loans will be affected, including those with banks such as Wells Fargo Bank, Bank of America, Citibank, J.P. Morgan Chase, and others.

Smaller banks, still large in size, will be affected since they must work with the larger institutions for capital, working capital, and the like.

Increased equity demands are simply quite likely to result in a tightening of collateral, enhancement of demands, and generation of some finance stress.

DLGpc clients are cautioned to be fully prepared to deal with these circumstances.

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