'Too Big to Fail' Banks to Get Leverage Ratio Boost
WASHINGTON (CN) - Three federal agencies plan to strengthen the leverage ratio standards of the nation's biggest banks, in a new regulation that would go into effect in 2018.
The Office of the Comptroller of the Currency, the Federal Reserve and Federal Deposit Insurance Corporation proposed a "well capitalized" six percent threshold ratio for banks that have at least $700 billion in consolidated assets.
The rule would apply to JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, Morgan Stanley, State Street and The Bank of New York Mellon.
"A perception continues to persist in the markets that some companies remain 'too big to fail,' posing an ongoing threat to the financial system," the agencies wrote in the notice of proposed rulemaking.
Consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agencies proposed an increase of leverage standards for the largest banks, based on the agencies' regulatory capital standards.
"In the agencies' experience, strong capital is an important safeguard that helps financial institutions navigate periods of financial or economic stress. Maintenance of a strong base of capital at the largest, systemically important institutions is particularly important because capital shortfalls at these institutions can contribute to systemic distress and can have material adverse economic effects," the agencies wrote.
"Further, higher capital standards for these institutions would place additional private capital at risk before the Federal Deposit Insurance Fund and the federal government's resolution mechanisms would be called upon, and reduce the likelihood of economic disruptions caused by problems at these institutions."
Earlier this year, the agencies revised the capital regulations that apply to banks, increasing the minimum risk-based capital requirements and changing the way banks were required to calculate risk-weighted assets.
The agencies established a three percent minimum supplementary leverage ratio, based on a bank's tier 1 capital and its total calculated leverage exposure for each reporting quarter.
Under the new proposal, a bank would be subject to a leverage buffer requiring it to keep its assets at least two percentage points above the minimum leverage ratio.
Banks that keep their leverage buffer at two percent or less would be subject to harsher limits on bonuses and distributions.
Comments on the proposed rule are due by October 21.