Eight large U.S.banks must boost capital levels by a total of $68 billion by 2018 under new federal norms, U.S. regulators said Tuesday, as they work toward putting checks and balances in place to reduce the risk of a repeat of the 2008 global financial crisis.
Under the new rules, banks with more than $700 billion in assets will need to change their leverage ratio, which measures the amount of capital that a bank holds against its assets, to 5 percent from 3 percent, and rely more on shareholder equity than debt for funding needs. The regulators also said that the banks must boost their capital holdings by $95 billion by 2018. The review period, during which banks can provide their opinion on the new regulations, will be open until June.
“The final rule applies to U.S. top-tier bank holding companies with more than $700 billion in consolidated total assets or more than $10 trillion in assets under custody (covered BHCs or bank holding companies) and their insured depository institution (IDI) subsidiaries. Covered BHCs must maintain a leverage buffer greater than 2 percentage points above the minimum supplementary leverage ratio requirement of 3 percent, for a total of more than 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments,” a statement from the Federal Reserve said, on Tuesday.
The new rule would apply to JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of New York Mellon Corporation (NYSE:BK) and State Street Corporation (NYSE:STT), all of whom are expected to cut back on risky financial transactions such as credit-default swaps.
"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," Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., said, according to Reuters.
Federal Reserve Governor Daniel Tarullo, referring to the importance of the leverage ratio and how that could help the banking fraternity, said in a statement Tuesday that “The leverage ratio serves as a critical backstop to the risk-based capital requirements,” adding: "It helps compensate for the possibility that risk-weighted measures understate the risk that large holdings of assets that are very safe in normal times may, as we observed during the financial crisis, become considerably less so in periods of serious financial market stress.”
While concerns remain that some U.S. banks are still so large that their failure would require taxpayers to bail them out in the event of a crisis in order to prevent the economy from collapsing, the banking industry is worried that the new rules could affect the banks' performance worldwide.
"This rule puts American financial institutions at a clear disadvantage against overseas competitors," Tim Pawlenty, head of the Financial Services Roundtable, a trade group for large banks, said in a statement, according to Reuters.