Risk-Based Capital Rule Seen Helping Foreign Bank Letter of Credit Business

By Pryde, Joan | American Banker, May 30, 1986 | Go to article overview

Risk-Based Capital Rule Seen Helping Foreign Bank Letter of Credit Business


Pryde, Joan, American Banker


Risk-Based Capital Rule Seen Helping Foreign Bank Letter of Credit Business

WASHINGTON -- A proposed Federal Reserve regulation on capital requirements could drive issuers of industrial development bonds to foreign banks for standby letters of credit, industry analysts said this week.

In January, the Fed proposed a regulation to require U.S. banks to adjust their capital levels according to asset risk. The risk-based standard would supplement the Fed's capital adequacy rule, which requires all banks to maintain a 6% capital-to-assets ratio. The comment period for the proposal ended two weeks ago.

Because the proposal would attach a high degree of risk to standby letters, "it would clearly force [U.S.] banks to charge a higher price for standby letters of credit, and that would make them less competitive" with foreign banks, said Ray Greer, executive vice president of Cates Consulting Analysts Inc. in New York.

A Fed spokesman said the agency has not set a date for implementing the plan, because it first must reevaluate the proposal in light of the comments received. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have proposed similar plans.

Under its plan, the Fed would assign a bank's assets and certain off-balance-sheet items to one of four broad risk categories, weight each item according to the relative risk of that category, and compute a bank's risk using a mathematical formula.

Items such as industrial development bonds, commercial paper, and standby letters of credit backing industrial development bonds would be placed in the fourth, or "standard risk," category and assigned the greatest risk weight. All state and local general obligation bonds would be placed in the third category, with other "moderate risk" items, including standby letters of credit supporting such bonds.

Bankers are worried that the regulation would force them to price standby letters of credit "significantly above returns being earned today in this business," Edward L. Yingling, director of government relations for the American Bankers Association, said in a letter to the Fed. "Commercial banks will see this traditionally high credit quality business being provided by others whose capital levels are more attuned to market reality than regulatory edict. …

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