Federal regulators propose leverage-ratio increases for big banks

The Hill

Congressional lawmakers expressed support on Tuesday for a proposal by federal regulators to ramp up requirements for the nation's eight largest banks to reduce the risks they pose to the financial system. 

The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are proposing that the banks raise their leverage-ratio standards — equity vs. assets — to 5 percent from 3 percent as the "too big too fail" debate continues on Capitol Hill.

The 5 percent threshold is higher than the 3 percent agreed on by international regulators. 

The proposed rule also would require the subsidiaries of insured banks to meet a 6 percent ratio to be considered "well capitalized." 

Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee, praised the proposal's adjustments.

“During the Basel III rulemaking process, I pointed out some of the weaknesses in using overly complicated risk-based capital standards, and I’m happy to see that the regulators are moving forward on a new rule to constrain excessive leverage through the use of a more simple and effective ratio that will help curb a lot of the gaming that goes on with risk weights,” he said.

Corker and a bipartisan group of senators have been pressing regulators to increase the requirements for the past several months. 

Sens. David Vitter (R-La.) and Sherrod Brown (D-Ohio) called the plan "a major step in the right direction of higher capital standards that so many have been pushing for." 

"It's encouraging that regulators are moving toward the standards in Brown-Vitter, which would end too-big-to-fail by ensuring that Wall Street megabanks can back up their risky practices," they said in a statement. 

The rule, if adopted, would take effect Jan. 1, 2018. 

But banks were less than pleased, arguing that the rule would not only hamper credit availability but make them less competitive around the world.

"This proposal goes beyond Basel III to impose a more difficult standard on our nation’s internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans — including loan commitments and derivatives that hedge risk — more expensive to offer," said Frank Keating, president and CEO of the American Bankers Association.

"Raising capital is not without cost, it means higher funding costs for loans and that fewer loans will be made."

Keating argued that if Basel III had a fundamental purpose it was to create a global standard designed to end international competition over capital levels. 

“The Federal Reserve’s stress tests clearly demonstrated that our nation’s banks are strong enough to withstand even the most challenging economic circumstances with the capital they currently hold," he said. "Doubling the capital requirements adds little protection, and may adversely affect the level and cost of credit that’s so vital to continued economic expansion."

The rule would apply to Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, Morgan Stanley, Bank of New York Mellon and State Street Bank.

Regulators argue that the rule, which is mandated under the Dodd-Frank financial law that passed in 2010, would lower the chances for future federal bailouts and would "reduce the likelihood of economic disruptions caused by problems at these institutions." 

The federal government doled out billions during the 2008 financial crisis to stave off the economic meltdown that led to a deep recession. 

"A strong capital base at the largest, most systemically significant U.S. banking organizations is particularly important because capital shortfalls at these institutions have the potential to result in significant adverse economic consequences and contribute to systemic distress both domestically and internationally," the regulators wrote.  

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