The U.S. Goes Bigger Than Basel

Regulators want the biggest lenders to have more capital | “We’re in the first few chapters of a horror story”

Yalman Onaran and Jesse Hamilton

U.S. regulators are pushing tougher standards for bank safety than their international counterparts, and more rules are coming. On July 9 they proposed that bank holding companies have capital equal to 5 percent of their assets, and that their federally insured banking units hold capital equal to 6 percent of assets. Capital — defined by regulators as the money the company has raised by selling stock, plus retained earnings — serves as a buffer against losses during times of stress.

The plan goes beyond rules approved in 2010 by the 27-nation Basel Committee on Banking Supervision to prevent a replay of the 2008 financial crisis. The Basel rules call for a capital level, or leverage ratio, of 3 percent of assets. That wouldn’t have done much to slow the growth of leverage during the years leading up to the 2008 crisis, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said when introducing the proposal. The capital standards would apply to eight U.S. institutions identified as being of global systemic importance: JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley, State Street, and Bank of New York Mellon. Based on the largest banks’ latest data, the holding companies fell short of the new capital requirement by $63 billion, and their insured lending units would need $89 billion, according to regulators.

Banks can raise capital by selling additional stock or holding on to more earnings by, for example, lowering dividend payouts. They can also meet the requirement by reducing assets — cutting back on lending, for instance.

The eight big banks may face additional rules. One measure coming “in the next few months,” says Federal Reserve Governor Daniel Tarullo, would compel banks to hold a set amount of equity and long-term debt to help regulators dismantle failing lenders. Other changes may include higher capital requirements for banks that rely on short-term loans to fund their operations, and capital surcharges that the Basel panel is preparing to impose on institutions whose failure might threaten the global financial system, according to Tarullo. Spokesmen for the banks declined to comment on Tarullo’s remarks. “We’re in the first few chapters of a horror story for the big banks, with the worst to come,” says Coryann Stefansson, a director at PricewaterhouseCoopers.

Banks would have until Jan. 1, 2018, to comply with the new U.S. capital rules. The proposal faces a 60-day public comment period and needs final approvals from the Fed, FDIC, and Office of the Comptroller of the Currency. Bankers have resisted new measures, saying the changes put in place after the financial crisis should be given time to work and that the restrictions will force them to reduce lending, harming profits. “As the economy starts to move, it’ll bite,” says Ernest Patrikis, a former Federal Reserve Bank of New York general counsel and now partner at White & Case. The rules will “make the U.S. banks a little less competitive, a little less profitable.”

FDIC Vice Chairman Thomas Hoenig, a longtime critic of too-big-to-fail banks and the government backing they enjoy, has called for a 10 percent leverage ratio. At the Fed, Tarullo has been the most vocal proponent of tougher standards. Even so, he’s served as a mediator between Hoenig and the rest of the Fed, helping to broker an agreement for the lower levels announced on July 9, people with knowledge of the negotiations say. Some Fed board members were concerned that raising the bar too high could have a negative impact on the fragile economic recovery.

The bottom line Regulators propose that eight big U.S. bank holding companies have capital equal to 5 percent of assets.


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