U.S. REGULATOR RULES SAY MAJOR BANKS MUST INCREASE CAPITAL BY $68 BILLION TO AVOID CRISIS AND RELYING ON CONSUMER DEBT

The eight biggest U.S. banks must boost capital levels by a total of about $68 billion under new rules, U.S. regulators said on Tuesday, prompting industry complaints that less-stringent global standards will give overseas competitors an advantage.

The rules would limit banks’ reliance on debt, part of efforts to prevent another financial crisis. By 2018, banks must rely more on funding sources such as shareholder equity, rather than borrowing money.

Banks’ insured subsidiaries face tougher limits and must boost capital holdings by a total of about $95 billion, regulators said.

Officials said most firms are already on track to comply and could meet the requirements by retaining earnings, or could shrink or restructure some assets to reduce capital needs.

The final rules show regulators are unwilling to budge from an increasingly tough stance on banking requirements, as they seek to shore up banks after the 2007-2009 financial crisis.

“In my view, this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations,” said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp (FDIC).
The rule would apply to JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.

The Financial Services Roundtable, a trade group for large banks, issued a statement blasting the limits, which are more stringent than the international Basel III agreement.

“This rule puts American financial institutions at a clear disadvantage against overseas competitors,” said Tim Pawlenty, the group’s chief executive.

“…this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations.”

 

The FDIC, Federal Reserve and Office of the Comptroller of the Currency approved the rules, implementing a portion of the Basel III agreement known as the leverage ratio, which is calculated as a percentage of a bank’s total assets.

The rules require the eight biggest bank holding companies to maintain top-tier capital equal to 5 percent of total assets. Insured bank subsidiaries must meet a 6 percent ratio. That’s higher than the 3 percent ratio included in the Basel agreement.

Smaller U.S. banks would be held to the 3 percent ratio, regulators said.

Scott Alvarez, the Fed’s general counsel, told a congressional panel on Tuesday that the 18 biggest banks have already boosted top-tier capital levels by more than $500 billion since 2008. He did not break down the total to show how much the top eight banks increased their capital.

Banks have until June to comment on the proposed changes.