Fed Delays New Rules for Banks Article

--Fed annouced a two year delay of capital requirement By MAYA JACKSON RANDALL WASHINGTON -- Amid continued strains in financial markets, the U.S. Federal Reserve on Tuesday announced a two-year delay of new capital requirements for bank holding companies that otherwise would have gone into effect later this month. Separately, The Federal Deposit Insurance Corp. moved Tuesday to extend the program guaranteeing debt issued by banks through October, though firms will begin paying a fee for the government protection. The amendments to the Federal Reserve Board's capital adequacy guidelines would have limited bank holding companies from including trust preferred securities and other capital elements in Tier 1 capital. These limits were scheduled to take effect on March 31, 2009, under a rule the Federal Reserve Board adopted on March 10, 2005. The Fed said the delay should give financial firms -- which need to boost overall capital levels during this challenging period in financial markets -- more flexibility to meet federal capital requirements. In more technical terms, the delay means all bank holding companies can include cumulative perpetual preferred stock and trust preferred securities in Tier 1 capital up to 25% of total core capital elements, the Fed said. "The delay will further the [Federal Reserve Board's] efforts, as well as the efforts of the other federal banking agencies and the U.S. Department of the Treasury, to respond to the current financial situation," the Federal Reserve said in the Tuesday morning statement. (Read the full statement.) The Fed added that economic conditions over the past 18 months "have created a situation in which requiring adherence to the new limits by the March 31, 2009, effective date creates a substantial burden for many BHCs [bank holding companies] in a way that was not anticipated when the final rule was adopted in 2005." With the financial markets continuing to face challenges, "it is especially important for BHCs to expend efforts to increase their overall capital levels, although it is challenging to do so now through retention of earnings, the most typical means," the Fed continued. "Therefore, to promote stability in the financial markets and the banking industry as a whole, the Board has decided to further delay the effective date of the new limits until March 31, 2011," it said. It added that the extended transition period should allow affected firms "sufficient flexibility to satisfy" the Federal Reserve Board's risk-based and leverage capital guidelines "during the current stressed market conditions." Among other things, the new rule would have required bank holding companies to deduct goodwill from the sum of core capital elements in calculating the amount of restricted capital that would be included in Tier 1 capital. Under limits on restricted core capital elements currently in effect, a bank holding company generally may include in Tier 1 capital cumulative perpetual preferred stock and trust preferred securities up to 25% of the sum of core capital elements including cumulative perpetual preferred stock and trust preferred securities, the Fed said. The new rules would limit restricted core capital elements included in the Tier 1 capital of a bank holding company to 25% of the sum of core capital elements including restricted core capital elements, net of goodwill less any associated deferred tax liability. In addition, internationally active bank holding companies would be subject to a further limitation. In particular, the amount of restricted core capital elements, other than qualifying mandatory convertible preferred securities, that an internationally active BHC could include in tier 1 capital couldn't exceed 15% of the sum of core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability, the Fed wrote in the notice. The Fed said the new limits would apply only to regulatory capital calculations and don't affect the liability of restricted core capital instruments to absorb losses. Still, the Fed said institutions that intend to issue new restricted core capital instruments should consult with appropriate reserve bank and board staff prior to issuance. "The Board finds that there is good cause for delaying the effective date of the final rule," the Fed said. "In addition, the delay will further the Board's efforts, as well as the efforts of the other Federal banking agencies and Treasury, to respond to the current financial situation."