(New throughout, updates with Fed approval)
By Emily Stephenson
WASHINGTON, April 8 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,
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.
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,
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.
The Basel III accord included both a leverage ratio and
risk-based capital requirements, which take into account the
riskiness of banks' assets.
Banks and other critics of leverage rules say they are
draconian and that risk-based capital requirements are more
tailored to banks' businesses.
While the rule may strengthen banks, "the potential for
adverse effects on market liquidity and the strength of the
system going forward could be real," Oliver Ireland, an attorney
at Morrison & Foerster in Washington, said in an email.
U.S. regulators said risk-based capital requirements are
easier to game than leverage rules. They said the 3 percent
Basel leverage ratio would not have been high enough to sustain
many banks through the financial crisis.
"The leverage ratio serves as a critical backstop to the
risk-based capital requirements," said Fed Governor Daniel
Tarullo, adding that regulators could write extra capital
requirements for banks that rely on risky, short-term funding.
The agencies also voted to issue a separate proposal to
adjust the way banks tally up their assets under the leverage
rules. The proposal, which would have to be finalized later,
changed those calculations to bring them more in line with the
Regulatory officials said the proposed changes would apply
to banks meeting the 3 percent Basel ratio as well as the eight
Regulators said the changes would result in a "modest"
increase in the amount of capital banks would need to hold.
They said banks needed $22 billion in additional capital
under the old calculation model, compared to $68 billion with
the Basel method. The proposed changes count credit derivatives
more and traditional loans less than the original model did.
Chip MacDonald, a banking lawyer at Jones Day, said the
difference of $46 billion in capital between the two calculation
systems was "more than a tweak."
"Unless something particularly compelling can be
demonstrated through the comment process, we're going to end up
with a much more stringent leverage requirement on the largest
banks," said Kevin Petrasic, a partner in the global banking
practice of law firm Paul Hastings.
Banks have until June to comment on the proposed changes.
(Additional reporting by Douwe Miedema and Peter Rudegeair.
Additional reporting by David Henry.; Editing by Karey Van Hall,
Leslie Adler, Bernadette Baum and David Gregorio)