FDIC Moves on Dodd-Frank Capital Requirements

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Dec. 14, 2010.

The Federal Deposit Insurance Corp. approved an interagency proposed rulemaking establishing that the capital requirements applied to thousands of insured banks nationwide must also serve as a floor for the capital requirements of the nation’s largest banks.

At a board meeting Dec. 14, 2010, FDIC Chairman Sheila Bair explained that in the years preceding the financial crisis, under the advanced approaches of Basel II, regulators allowed the largest banks to use their own internal models to set individual risk-based capital requirements. The premise, she noted, was that the largest banks didn’t need as much capital as smaller banks due to their sophisticated internal risk models and diversification. “The crisis demonstrated the fallacy of this thinking,” Bair said.

The proposed rulemaking would implement certain requirements of Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the “Collins Amendment” after its author, Sen. Susan Collins, R-Maine. The rulemaking would replace the transitional floors in the Basel II advanced approaches with permanent risk-based capital floors equal to the capital requirements computed using the agencies’ general risk-based capital rules. If the agencies amend these requirements over time they would then serve as a new floor.

Bair said the Collins Amendment “will do more to strengthen the capital of the U.S. financial system than any other section of the Act. Large financial institutions need the capital strength to stand on their own without government assistance.”

The rulemaking also grants the Federal Reserve Board additional flexibility to create capital requirements for nonbank institutions it supervises, as a result of determinations made by the Financial Stability Oversight Council.

The FDIC also voted to set the insurance fund’s designated reserve ratio at 2.0 percent of estimated insured deposits. The Dodd-Frank Act set a minimum requirement of 1.35 percent.