The Federal Reserve issued new bank capital rules Tuesday but plans on following up with tougher restrictions to reduce the odds of another financial crash or taxpayer bailouts. That could spur banks to curb lending now to be ready for the future mandates.
The latest rules are generally in line with earlier proposals to implement Dodd-Frank financial reforms and international standards from the Basel Committee. They are seen doubling the capital required as a buffer against losses.
"These new rules will be an essential component of a set of mutually reinforcing capital requirements," said Fed Governor Daniel Tarullo, in a statement.
Capital Proposals Eased
Compared to original proposals, regulators loosened capital requirements for potential losses on mortgage loans and on small community banks, which have complained that rules for financial giants shouldn't apply to them.
U.S. stock indexes fell on turmoil in Egypt and Europe. Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) fell modestly after staying flat to slightly higher earlier. JPMorgan Chase (JPM) edged up.
Some Fed officials have been saying top banks remain "too big to fail" but stop short of calling for their breakup. Instead, they have focused on capital buffers that would protect them in times of stress and raise the costs of being big. Big banks enjoy cheaper borrowing because investors assume the federal government would bail them out again.
Other rules on the way include special surcharges, additional capital requirements for banks that depend on short-term whole sale funding, and amounts of debt that must be held for conversion into stock for a crisis "bail-in.
But the upcoming rule that's considered the most stringent is one that would limit total leverage. While other rules take into account how banks weigh risks differently on various assets, the leverage ratio wouldn't.
"It's a brutally simple test," said Ernie Patrikis, a partner with the White & Case law firm and a former New York Fed official. "Less game-playing can go on.
Wider Stress Tests
He also notes that the focus on quantitative standards seems to suggest less faith in more qualitative methods. But the Fed also plans to subject about a dozen more banks to its annual stress tests, beyond the current 18.
The rules aren't final but banks are making adjustments now, just as they made changes ahead of Tuesday's rules, Patrikis said.
"It's already going on," he said. "Institutions around the world have been selling assets something fierce.
Leading up to the rules' eventual implementation, he expects lending to be affected marginally and sees banks favoring more lucrative transactions.
Any tightening in credit would come as some industries say that standards are too high. For example, Realtors maintain that small homebuilders aren't getting the loans needed to grow the housing supply enough to meet demand.
Other surveys show that banks have started to loosen credit, but demand remains weak.
Borrowing costs are also up. The recent spike in mortgage rates has slashed refinancing but home purchases continue to rise.
Bond yields should have less impact on consumer loan rates, which are generally tied to the fed funds rate. Fed officials have said considerable time will pass between the end of asset purchases and the first fed funds hike.