Under the scheme, called Total Loss-Absorbing Capacity, big banks will have to fund themselves with loss-absorbing capital equal to 16-20% of their risk-weighted assets from 2019.
§ 252.63 External total loss-absorbing capacity requirement and buffer.
These funds are designed to absorb losses as assets change in value.
In a 571-page report issued last month, the Commission had called for a much tougher "leverage ratio" for banks - a measure that limits the total amount of loans and investments a bank can make relative to the amount of capital the bank holds to absorb losses on those assets.
As such, any losses on assets could again be absorbed first by principal appreciation on other assets, second by excess interest, and finally by the initial equity invested at closing, with principal appreciation on all assets as the hallmark of the Patriarch CDOs.
Bank of America will absorb initial losses on the assets up to $10 billion; the government will shoulder 90% of subsequent losses up to a maximum of $10 billion.
Keep 17-20% of certain assets as "loss-absorbers" Another of the ICB's recommendations is that banks must have a buffer to absorb the impact of potential losses or future financial crises - of at least 10% of domestic retail assets in top-quality form, such as shares or retained earnings.
The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline.
Two weeks after closing its purchase of Merrill Lynch at the urging of federal regulators, the government cemented a deal at midnight Thursday to supply Bank of America with a fresh $20 billion capital injection and absorb as much as $98.2 billion in losses on toxic assets, according to people involved in the transaction.
The government absorbed their assets, including the unfinished skyscraper, during a 1994 banking crisis.
Systems were reset, business resumed, small losses were absorbed.
