On Tuesday, the Federal Reserve Board, the Federal Deposit
Insurance Corporation (FDIC), and the Office of the Comptroller
of the Currency (OCC) proposed stricter borrowing rules for most
systemically significant U.S. banking organizations. The tougher
rules intend to make banks more dependent on equity capital as
compared with its reliance on debt and riskier assets.
The regulators are contemplating proactive measures to ensure
that the world's largest banks strengthen their capital and
liquidity positions to confront another financial meltdown.
Alongside, they are set to carry out on-site assessments of the
financial condition of the banks.
A weak capital level is always a threat to the global economy.
Needless to say, meeting new rules would act as building blocks
for the still shaky global economy, with fewer bank collapses and
less involvement of taxpayers' money for the bailout of troubled
The proposed rule directs bank holding companies (BHCs) with more
than $700 billion in consolidated total assets or $10 trillion in
assets under custody (covered BHCs) to maintain a tier 1 capital
leverage ratio of 5%. The new requirement exceeds the minimum
leverage ratio of 3% recommended by international banking
regulators as part of the Basel III standards. However, failure
to achieve the requirement would restrict BHCs for discretionary
bonus payments and capital distributions.
Additionally, the proposed rule requires insured depository
institutions of covered BHCs to maintain a 6% supplementary
leverage ratio to be considered as a "well capitalized"
institution for prompt corrective action purposes. The proposed
rule is open for public comments over the next 60 days.
The rule, which takes into consideration off-balance sheet items
such as derivatives and loan commitments, is expected to be
effective in a phased-in-manner as on Jan 1, 2018. This rule will
impact 8 most systemically significant U.S. banking
organizations, which include
JPMorgan Chase & Co.
Bank of America Corporation
The Bank of New York Mellon Corporation
The Goldman Sachs Group, Inc.
State Street Corporation
Wells Fargo & Company
Moreover, the tougher capital rules, which were approved by the
Federal Reserve on Jul 2, 2013, got the consent of FDIC and OCC
as well. These rules suggest that U.S. banks would need to set
aside more capital as buffer to tide over unexpected losses.
Banks will be required to maintain a new minimum common equity
tier 1 ratio of 4.5% of risk-weighted assets (RWAs) and a common
equity tier 1 capital conservation buffer of 2.5% of RWAs
applicable to all supervised financial institutions.
These rules might limit the flexibility of the banks with respect
to investments and lending volumes. Moreover, such stringent
capital rules may considerably slacken the pace of a worldwide
economic recovery in the near term.
Overall, structural changes in the sector will continue to impair
business expansion and investor confidence. Several dampening
factors -- asset-quality troubles, mortgage liabilities and
tighter regulations -- will decide the fate of the U.S. banks in
the quarters ahead. However, foraying into the new capital regime
will ensure long-term stability and security for the industry.
Though the improving performance by the banks seems already
priced in and there remain significant concerns, the sector's
performance in the upcoming quarters is not expected to
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