Big Banks to Feel Brunt of Risk-Based Capital Plan; Fed Would Apply Capital Rules to Off-Balance-Sheet Activities

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WASHINGTON -- Large banks are going to find off-balance-sheet activities less attractive and liquid assets more alluring. Smaller banks are simply going to breathe a sigh of relief.

That's the preliminary view of experts who have examined the Federal Reserve Board's risk-based capital proposal, which the Fed governors unanimously decided to issue for public comment Wednesday.

In a related development, two other banking agencies -- the Comptroller of the Currency and the Federal Deposit Insurance Corp. -- said Wednesday that they intend to solicit public comment on their own risk-based capital plans.

The principal effect of the Fed's proposal would be to bring certain off-balance-sheet operations -- particularly standby letters of credit -- under the capital requirements. Because off-balance-sheet activities are currently not counted as assets, they are not taken into account when calculating a bank's required capital ratio.

The issuance of letters of credit, which are a Bank's guarantee that a customer will complete a transaction, is booming at the nation's largest banks. If the Fed goes ahead with its plan, bank holding companies such as Citicorp, BankAmerica Corp., Chase Manhattan Corp., Manufacturers Hanover Corp., and other large money center institutions heavily involved in letters of credit will see their regulatory capital levels drop.

The Fed plan would not affect an existing requirement that banks maintain capital equaling at least 6% of their assets.

The proposal divides assets into four risk categories -- each with a different capital requirement. For most assets, however, the Fed proposal would not require banks to add any capital. Banks won't be "penalized" for risky loans, experts say.

"How close you can run to that minimum depends on your risk profile," William Taylor, the Fed's director of bank supervision and regulation, said in a telephone interview. While the plan won't force banks to raise more capital to cover assets already on the balance sheet, he said, it will encourage them to "do more high-liquid, high-quality business." Under the current standard, he said, "no one wants the liquidity -- it reduces their margin."

Bank analyst David Cates, of Cates Consulting Analysts Inc. in New York, predicted that the larges 200 banks could be affected by the proposed guidelines. Mr. Cates criticized the proposal for failing to include a fifth category for "substandard" assets.

Others predict that even fewer banks would feel the effects of the proposal. "I suspect it will really affect no more than a handful of major banks -- though there may be any number of troubled institutions doing foolish things that might get caught by it," said Washington attorney William J. Sweet, who represents a number of large banks.

"It should not greatly affect our banks," said Diane Casey, regulatory liaison for the Independent Bankers Association of America, which represents community bankers. "The Fed proposal looks like it is targeted at large banks that have a great deal of off-balance-sheet activities."

The Independent Bankers Association, Ms. Casey said, was pleased that the Fed proposal did not distinguish between types of loans by assigning more risk to, say, an agricultural loan than to a commercial loan.

Officials at the American Bankers Association said the plan is worth studying but expressed concerns about its effects. "We are concerned that the proposal may reduce bank's flexibility to lend to certain types of business due to their assessed risk by regulators," Donald G. Ogilvie, ABA executive vice president, said in a prepared statement. "The banking industry has significantly increased its capital in recent years, and there is no demonstrated need for further increases."

Recent data compiled by the Federal Deposit Insurance Corp. show that the 25 largest U.S. bank holding companies have more than $929 billion outstanding in off-balance-sheet assets. …