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An Unwelcome Shock for Small Banks

New regulations could force some community banks out of business


The Federal Reserve dealt a rough blow to banks last week when it approved strict bank-capital standards.

The new rules — known as Basel III — will apply to all U.S. banks and could prove especially challenging for smaller regional and community banking institutions, The Wall Street Journal reported.

Investors Still Pinning Hopes on Central Banks
Investors Still Pinning Hopes on Central Banks

The third of the Basel Accords, Basel III bolsters bank capital requirements as well as establishes regulatory requirements on bank liquidity and bank leverage. In a nutshell, the Fed wants to ensure that banks have a large enough cushion to protect themselves — and their customers — should they face unexpected losses.

Under the new requirements — which will not go into effect until 2019 — Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and 15 other big banks will be required to raise at least $50 billion in capital to stay open. All other banks will need to have at least $10 billion in capital, which could force many small financial institutions into closure.

The $10 billion requirement shocked many who run regional and community banks. Cathleen Nash, chief executive Citizens Republic Bancorp (NASDAQ:CRBC), told the WSJ she had expected the Basel III cutoff would not apply to banks with less than $10 billion in assets. The Michigan-based Citizens Republic holds about $9.6 billion in assets.

In addition to the regulatory requirements regarding capital, the Fed also proposed rules to stop banks from relying on credit ratings to evaluate the riskiness of their assets, the WSJ reported.

The FDIC and the Comptroller of the Currency are expected to approve the proposals sometime this week.

Article printed from InvestorPlace Media,

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