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The Shadow Financial Regulatory Committee has expressed its concern in past policy statements that the FD1C Improvement Act (FDICIA) grants the bank regulatory agencies excessive discretion with respect to when to trigger prompt corrective action and how to determine the least-cost method of insolvency resolution (Statement No. 76, December 16, 1991). Most worrisome is the discretion to declare a bank a source of systemic risk, which can be used to justify protecting all depositors, including other banks, at institutions the FDIC considers "too important to fail." This latitude provides the rationale for regulating limits on interbank exposure. The Committee urges the regulators to foreswear the use of this discretion so that such regulations would not be necessary. Indeed, banks whose funds are at risk are, by their very nature, well suited to monitor other banks.
To implement Section 308 of FDICIA, federal bank regulatory agencies have proposed limits, effective at year-end 1992, on a bank's credit exposure (principally interbank placements, correspondent balances and sales of federal funds) to other banks that are not classified as "well capitalized." This classification is currently defined as risk-based capital in excess of 10 percent and tier 1 leverage in excess of 5 percent. Banks are restricted to having an exposure of no more than 50 percent of their total capital to banks that are "adequately capitalized" (currently defined as risk-based capital of 8 to 10 percent and tier 1 leverage of 4 to 5 percent) and to having no more than 25 percent of capital to "undercapitalized banks" (less than 8 percent risk-based capital and 4 percent tier 1 leverage). Adequately and undercapitalized banks account for some 10 percent of all banks, holding about 45 percent of total bank assets.
Unfortunately, the proposal specifies these lending restrictions in terms of the book value of a bank's net worth. The Committee has repeatedly emphasized that to be effective, all restrictions related to capital need to be expressed in terms of the market value of a bank's net worth.
In general, the proposed regulations do not appear to impose undue burdens on the banks relative to the potential cost savings to the FDIC fund. They also encourage large banks that are not well capitalized to strengthen capital positions in order to maintain their interbank business.
π SIMILAR VOLUMES
In August, the federal bank regulatory agencies each proposed rules to implement an important part of Section 305 of the FDIC Improvement Act of 1991. The proposed rule responds to the requirement that risk-based capital standards be revised to account for interest rate risk. The Shadow Financial Re
The federal banking agencies and the Office of Thrift Supervision recently promulgated a final rule implementing the requirement of Section 305 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). This rule requires that the risks from credit concentration be incorporated i