The Fed estimated the banking industry would face a capital shortfall of almost $60 billion if the proposed capital buffers of Basel III were in effect today. That compares with a Basel committee survey's finding that the largest global banks would confront a $639.5 billion shortfall if forced to have a 7 percent core capital buffer last year. The regulators anticipate U.S. banks could meet their 2019 requirement by retaining earnings rather than raising capital.

Yesterday's interagency proposal to implement Basel's 2010 decisions stuck mostly to the original international framework. The new regime more than doubles minimum capital requirements, tightens the definition of capital and improves risk measurements for loans.

"The proposal ups the ante on Europe regarding Basel III implementation, even as it leaves off the table for now the liquidity components," said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm. "By implementing some of the framework for all U.S. banks, the Fed seems to be bowing to years of political pressure from Europe."

The regulators didn't include liquidity rules agreed to by Basel two years ago and are reworking them for a later release.

'Harsher' Rules

Wayne Abernathy, an executive vice president at the American Bankers Association, said the rules as drafted will affect every U.S. bank and called that one of the surprises in the nation's "coming-out" party for Basel III.

Bankers, without time to dig into the details, already are concerned that regulators will create "harsher" rules on mortgages and some classes of commercial real estate, he said.

Dodd-Frank's credit-ratings ban — one of the major U.S. departures from Basel — slowed the process in the U.S. as regulators devised alternatives. Congress barred ratings after firms including Standard & Poor's and Moody's Investors Service gave their highest grades to mortgage-backed securities, which allowed lenders to treat them as risk-free in the years before the 2008 financial crisis.

The U.S. rules replace ratings of sovereign bonds with classifications of country risk devised by the Organisation for Economic Co-operation and Development that assign zero risk to most European government debt, including that of Greece and Portugal.

The so-called market-risk rules, which will be finalized when all the regulators' boards approve them, cover capital charges for assets on bank trading books. The market-risk rules would take effect Jan. 1.

The market-risk rule also contains formulas for determining the riskiness of securitizations. The equations correlate risk weightings with the hierarchy of tranches: If a bond is lower in the order of receiving payments and among the first to get hit by losses when loans in the package start defaulting, it's assigned a higher risk. Moody's and S&P also would rate such a bond lower, implying a higher default risk.

The Basel committee has undertaken a fundamental review of the market-risk rules once again this year and is likely to overhaul the way they're done.

The global body also is reworking parts of the liquidity regulations, especially those that relate to how much cash or easy-to-sell assets banks should hold to meet their long-term liabilities.

'Good Governance'

"We cannot declare with these proposed rules, 'mission accomplished,'" said Fed Governor Sarah Bloom Raskin. "Capital requirements do not compensate for good governance and appropriate risk management by the institution."

Raskin, who still supported the proposals along with all of the other Fed governors, said she's skeptical about letting big banks rely on internal modeling to ensure proper liquidity.

Top U.S. bankers including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon have warned in the past year that stricter capital rules may curb economic growth by making it more expensive to lend. That view was reiterated in a statement yesterday by the Securities Industry and Financial Markets Association, a Wall Street lobbying group, which said setting excessive capital requirements will limit the availability of funds that support new investments and job creation.

Mike Kiley, an associate director on the Fed's research team, said its analysis found "significant economic benefits" from higher capital requirements because they reduce the probability of a financial crisis. The staff also found that the requirements could affect the supply of credit, he said.

"Nonetheless, such long-run adverse consequences were estimated to be modest relative to the benefits," and total estimated impacts on economic growth were "quite low," he said.

"While policy-making by the Basel committee is an important step, it has to still flow through national bodies to be effective," said Stefan Walter, the committee's secretary general until October and now a principal at Ernst & Young LLP. "Asian countries and the EU have introduced their local rules in this vein. Now the U.S. coming out with its version is very crucial for the global implementation of the rules."

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