Big Banks Granted Flexibility in Calculating Capital

By Dow Jones Business News, 
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WASHINGTON--U.S. regulators on Friday gave eight of the largest U.S. banks permission to use an alternative method to calculate their capital levels, giving them more flexibility in weighing the riskiness of their balance sheets but also subjecting them to additional requirements for measuring such risk.

The regulators' approval marks a milestone for the banks, which in some cases have been working toward receiving it for years. But none of the banks are likely to see eased capital requirements as a result of the change because the 2010 Dodd-Frank law set a minimum for bank capital levels. Capital levels are likely to only increase as a result of Dodd- Frank, which sought to boost the amount of financing at banks so they could weather severe economic times.

The banks receiving the approval are The Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley, Northern Trust Corp., State Street Corp., and U.S. Bancorp.

The Federal Reserve and the Office of the Comptroller of the Currency said the banks had completed a minimum 12-month test run to show they could accurately gather data on their assets and meet heightened standards for measuring the risks associated with them. The banks will begin using the new calculation method starting in the second quarter of 2014 and incorporate it into stress tests beginning Oct. 1, 2015, the agencies said in a press release.

The Fed in 2007 required internationally active big banks--those with more than $250 billion in total assets or at least $10 billion in on-balance sheet foreign exposure--to adopt a second approach for calculating their capital levels. Some other banks that appear to meet that threshold, including Bank of America Corp. and Wells Fargo & Co., didn't receive approval Friday.

Bank regulators generally require banks to maintain minimum capital levels, often in the form of common equity, to absorb losses in a downturn. Banks that hold more risky assets generally have to raise more capital, which can increase their costs of doing business.

The alternative capital approach, agreed to by international regulators on the Basel Committee on Banking Supervision, gives banks the ability to use internal data to judge the riskiness of various loans, such as mortgages. Traditional methods of calculating capital are less flexible and generally treat categories of assets the same way, regardless of the condition of a particular bank's portfolio.

Write to Ryan Tracy at ryan.tracy@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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