Recently, the Federal Reserve Board, the Federal Deposit
Insurance Corporation (FDIC) and the Office of the Comptroller of
the Currency (OCC) finalized stricter borrowing rules for 8 most
systemically significant U.S. banking organizations. The tougher
rules require the banks to be dependent more on equity capital
than on debt and riskier assets.
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Since the financial crisis, regulators have been contemplating
several proactive measures to ensure that major U.S. banks
strengthen their capital and liquidity levels to withstand
another financial downturn.
A weak capital level is always a threat to the global economy.
Needless to say, compliance with new rules would pave the
restoration of a still shaky global economy, with fewer bank
collapses and less involvement of taxpayers' money for the
bailout of troubled financial institutions.
The rules direct 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 restrain BHCs from discretionary
bonus payments and capital deployment.
Additionally, the rules require 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 rule, which takes into
consideration off-balance sheet items such as derivatives and
loan commitments, will be effective from Jan 1, 2018.
Nevertheless, the banks will have to calculate and report the
levels beginning 2015.
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
). As per an assessment by the Fed, in aggregate, these banks
will have to raise roughly $68 billion to meet the new
regulations while the shortfall for banking subsidiaries is
nearly $95 billion.
A New Proposal
The regulators have come up with another proposal that will
further strengthen the banks' balance sheet position. They issued
a notice of proposed rulemaking (NPR) that will modify the manner
in which the supplementary leverage ratio is being calculated.
This would be in accordance with the new international standards
under Basel III.
The proposed rule will be applicable to all banks that are
required to meet 3% leverage ratio and not only the eight banks
mentioned above. The proposed change requires banks to
calculate investment holdings using daily averages.
This new proposal is open for public comments through June 13.
Still a Long Way to Go
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, conformity to the new capital regime
will ensure long-term stability and security for the industry.
Notably, when the rules were proposed last year in July, many of
these eight banks appeared to fulfill the required criteria.
However, if the above proposal is finalized, the banks will
likely have to increase those assets that will be considered
under the leverage ratio calculation. This will expectedly compel
the banks to hold more capital.
Though the improving performance by the banks seems already
priced in and there remain significant concerns, the banking
sector's performance in the coming quarters is not expected to