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FDIC’s Norton wants stricter capital rules than Basel III offers

Jeremiah Norton

Jeremiah Norton

Jeremiah Norton, a board member of the FDIC, said this week that American banks should have to meet stricter capital standards than the rules established under the controversial Basel III accord.

Norton said that regulators, including the FDIC, the OCC and the Federal Reserve should consider minimum leverage ratios derived from the tangible common equity against non-risk weighted bank assets, Bloomberg reports.

“There is growing empirical evidence that a leverage ratio based on total assets is a better predictor of banks distress than a risk-based capital ratio [under Basel III],” Norton said, according to Bloomberg.

FDIC Director Thomas Hoenig, another board member, has made calls to eliminate the Basel rules and simplify bank leverage ratios, making a call to legislators to craft a rule based on the ratio of tangible equity to tangible assets.

“We should learn from past experience and turn our attention from using a capital rule that gives what in the end is a false sense of security to one that is effective because of its simplicity, clarity and enforceability,” Hoenig said, Bloomberg reports.

Under the Basel III rules proposed by U.S. regulators last summer, American banks are required to hold a capital buffer of at least seven percent of bank assets adjusted by risk to protect against market instabilities and economic shocks.

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