[ by Howard Haykin ] The Federal Reserve announced Thursday proposes that U.S. banks adopt a broad package of international regulations aimed at making the global financial system more resilient to shocks.  The proposal, drafted by a group of central banks and national bank regulators, was based on Basel III global regulatory standard that would require banks to hold sturdier buffers against losses.  The Basel Committee on Banking Supervision devised the rules.  following the 2008 financial crisis. The Fed's Proposal, and Basel III Standard. The Fed's proposal focuses on capital, which banks must hold to protect themselves against potential losses.  The critical requirement compares Tier 1 common capital with a measure of a bank’s assets. Thursday’s proposal would require Tier 1 common capital that amounted to 7% of assets by the end of 2018, when the phase-in period for the regulations would end. The Fed’s proposed rules will be open to public comment for 90 days. Anticipated Requirements. Many of the requirements have been known for months, and banks are already fortifying their balance sheets in preparation - e.g., Citigroup, which was severely undercapitalized at the outset of the financial crisis, said it had an estimated Basel III ratio of 7.2% as of 3/31/12.  JPMorgan Chase, under scrutiny because of its multibillion-dollar derivatives loss, has not publicly disclosed its current estimated Basel III ratio.

• Largest global banks are likely to be required to have capital levels higher than 7% - with the largest positioned at or about 9.5%.
• Despite the stricter requirements, many banks would be allowed to pay out their capital in the form of dividends and share buybacks.
• Banks will have a lead-time to fully comply - more than 6 years - with the new rules, with the phase-in period starting next year.

Basel III Critics. The Basel III standards have plenty of critics. Some bankers say they are overly burdensome, arguing that even a slow introduction could crimp lending.  Under Basel III, banks would have to hold more capital against certain types of mortgages, which could deter banks from making home loans.  A Federal Reserve official responded that the Basel III rules were intended to give banks incentives to write sound mortgages, not hamper lending. Some analysts say they think the rules are too weak and could lead to dangerous unintended consequences.  Through a practice known as risk-weighting, Basel III allows banks to hold less capital against assets that the rule makers assume are less risky, like government bonds. The European sovereign debt crisis shows the potential danger of this approach. For further details, go to:   [Dealbook, 6/7/12].