US banks criticise debt-limiting rule

23:31, Apr 08 2014

The eight biggest US banks must raise a total of about US$68 billion ($78 billion) in capital by 2018 to comply with a new rule designed to prevent another financial crisis.

The requirement has prompted industry complaints that international standards are less restrictive and give their global competitors an advantage.

US regulators on Tuesday (US time) finalised the rule to limit banks' reliance on debt. Banks will have to fund part of their business through less risky sources such as shareholder equity, rather than by borrowing money.

"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, which approved the rule on Tuesday. The Federal Reserve was scheduled to vote on it in the afternoon.

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 that 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's vote on Tuesday implements 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 Federal Reserve's board plans to vote on the rules later on Tuesday. Comptroller of the Currency Thomas Curry, who sits on the FDIC's board, approved the rules on behalf of his agency.

The final rules would require the eight biggest US banks to hold capital equal to 6 per cent of their total assets. Their bank holding companies would have to meet a 5 per cent ratio.

That's higher than the 3 per cent ratio included in the Basel agreement. Smaller US banks would be held to the 3 per cent ratio, regulators said.

US officials said the biggest banks appear likely to meet the higher requirements in time.


The Basel III accord included both a leverage ratio and risk-based capital requirements, which take into account the riskiness of banks' assets.

Critics of leverage rules, including many banks, say risk-based capital requirements are more tailored to banks' businesses and that leverage rules are unfairly draconian.

"While the ostensible effect may be stronger individual banks and bank holding companies, 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.

US regulators, including FDIC Vice Chairman Thomas Hoenig, argued leverage ratios are harder for banks to game. Hoenig said the 3 per cent Basel leverage ratio would not have been high enough to sustain many banks through the financial crisis.

"Banks with stronger capital positions are in a better position to lend, to compete favourably in any market, and to achieve satisfactory results for investors," Hoenig said.

The agencies proposed adjusting the way banks tally up their assets under the leverage rules. They tweaked those calculations to bring them more in line with the Basel rules.

Regulatory officials said the proposed changes, which would apply to banks meeting the 3 per cent Basel ratio as well as the eight biggest firms, would require more capital for credit derivatives and less for traditional loans.

They said the changes would result in a "modest" increase in the amount of capital banks would need to hold.

Banks have until June to comment on the proposed changes.