US Federal Reserve to draft tough rules for banks

The US Federal Reserve pledged to draft tough rules for Wall Street even as it sought to shield smaller banks against some of the requirements of the global Basel III capital rules it adopted on Tuesday.

The central bank voted in favour of the long-awaited US version of the global rules which mandate banks to arrange more equity capital to fund their business, to secure them in the event of contingencies like the 2007-09 credit meltdown.

While offering some flexibility to spur housing recovery and benefit smaller banks in its final rule, it said it would write four new rules over the coming months to address concerns about the risk the eight largest US banks posed to the financial system.

According to Allison Breault, an associate at law firm Cleary Gottlieb Steen & Hamilton in Brussels, the headline here was that community banks were getting significant relief.

She added, the largest banking organisations were going to be subject to even stricter requirements than they had originally anticipated.

The Basel III accord, which derives its name from the Swiss city that was home to its overseer, the Bank for International Settlements, was aimed at making banks more stable following the worst financial crisis since the Great Depression.

Meanwhile, the financial world breathed a sigh of relief Tuesday after it became clear that the new Fed standards for strengthening bank defenses against losses had eased up in some controversial areas and while producing no unexpected new demands.

According to American Bankers Association chief executive, Frank Keating, the implementation of the international standards known as Basel III, while not perfect, ''brings us closer to optimal capital rules.''  Keating said in a statement that  he expected the rules would have to be tweaked as their real-world consequences became known.

''We appreciate regulators' willingness to listen to an unprecedented number of comment letters submitted by thousands of ABA member banks, all of our country's state bankers associations and every state banking regulator,'' Keating said.

''Those efforts clearly had an impact, and we're hopeful this open line of communication will continue as the process moves forward.''

The relaxation on certain requirements came on capital for holding as mortgage against losses, a measure meant to encourage community banks to extend home loans.

For big home lenders like Wells Fargo & Co though the bad news came with the Fed imposing stricter requirements for capital held against the risks of mortgage servicing.