Big banks may have to double minimum capital

Federal regulators consider a change that could force some big banks to cut dividend payments.

BLOOMBERG NEWSJune 25, 2013 

The standard would increase the amount of capital the lenders must hold to 6 percent of total assets, regardless of their risk, according to four people with knowledge of the talks. That's twice the level set by global banking supervisors.

Regulators last year proposed implementing the 3 percent international requirement for what's known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private.

"The 3 percent was clearly inadequate, nothing really," said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. "Going up to 5 or 6 (percent) will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool, because risk-weighting can be gamed by banks so easily."

Five of the six largest U.S. lenders, including JPMorgan Chase and Morgan Stanley, would fall under the 6 percent level, according to estimates by investment bank Keefe, Bruyette & Woods Inc. That means they would have to retain more of their earnings and withhold dividends to build capital. Only Wells Fargo would meet the standard now.

U.S. banks have had to comply with a simple leverage requirement of 4 percent for two decades. The new version, proposed last June, expands the definition of what counts as assets in calculating the ratio, incorporating some commitments such as lines of credit kept off balance sheets under current accounting rules. The draft is an attempt to bridge U.S. and international accounting standards.

Lenders in the United States and in more than 100 other countries already comply with risk-based capital rules that assign weightings to assets based on their riskiness. Corporate debt is given a heavier weight than government bonds, requiring that more capital be held against it. As more of the calculations shifted to complicated models designed by banks, the credibility of the risk-weightings has been challenged.

FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules in favor of a simple 10 percent leverage ratio.

The Fed and the FDIC declined to comment.

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