Minimum Capital Requirements for Banks Under Risk-Based Capital Standards

GAO discussed the proposed minimum capital requirements for the banking industry. GAO found that: (1) three bank regulatory agencies adopted final risk-based capital holding standards; (2) although the Office of the Comptroller of the Currency (OCC) proposed a 3-percent floor, the Federal Deposit Insurance Corporation (FDIC) maintained that a risk-based capital, even with the proposed floor, could allow some banks to reduce capital from the required levels under the current standard and increase the risk of loss to the deposit insurance fund; (3) FDIC preferred to set the capital floor level higher and believed that banks with assets greater than $1 billion would have to increase capital to meet the requirements, while smaller banks would not have to raise any capital, even with a 3-percent minimum ratio; and (4) OCC believed that implementing risk-based standards would reward less risky banks, while FDIC believed that the standards forced risky banks to raise capital. GAO believes that the agencies: (1) should not lower capital requirements for any banks until bank regulators have sufficient resources and have had demonstrated their ability to oversee and enforce more complicated standards, and FDIC insurance reserves have increased to the minimum mandated levels; and (2) should consider whether they can develop adequate provisions to include other risks in the standards and eliminate or reduce some of the other incentives for unsound practices in the system.