The Federal Reserve today finalized the U.S. version of the Basel II.5 rule (see FSM Report RATINGS48) and proposed a suite of rules to implement Basel III (see FSM Report CAPITAL173).  The new rules are very long and detailed because they not only implement Basel II.5 and Basel III, but also revisit all current capital rules to harmonize them among all the agencies and with regard to the new requirements.  As such, the Board’s action (soon to be followed by the OCC and FDIC) redefine U.S. regulatory capital for all insured depositories over $500 million in assets and their holding companies, and in general, significantly increase all of these standards and the internal discipline needed to comply with them.  Anticipating a lot of push-back on these initiatives, FRB staff provided macroeconomic analyses to demonstrate that all of the rules are on balance strongly positive, although several governors questioned aspects of the research backing this up (in part due to the market pressure to comply more quickly than the lengthy transition periods otherwise permit).

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