Strict new leverage
requirements will be proposed by the FDIC on Tuesday requiring big banks
to have common equity of at least 5 percent of their assets, perhaps as high as
6 percent. This is much stricter than the international banking regulations
known as Basel III, which requires 3 percent of “simple leverage.”
The proposed rule includes
off-balance sheet items but will not be adjusted for risk. The rule is intended
to ensure that banks have enough capital to weather a severe downturn, such as the
one in 2008. Banks have countered that the new leverage rules will hamper their
ability to lend by limiting the amount they can borrow to fund loans. By including
the off-balance-sheet items into the ratio, the regulators have made banks'
capital burdens much heavier.
Currently, banks are allowed
to use risk weighting and create their own models to calculate their loss risk
and the capital needed to cover such losses. The FDIC questioned the
credibility of the calculations as they became more complex and harder to
understand.
For several months, the FDIC
has been pushing for a more restrictive leverage ratio, while the Federal
Reserve has dragged its feet in taking a position. At an open board
meeting last Tuesday, the Fed approved a Basel minimum leverage standard for
U.S. banks. At that meeting, Fed Gov. Dan Tarullo said the regulators were very
close to coming out with an additional leverage protocol.
Comments by Trullo indicate a
willingness to increase leverage in order to put safeguards in place:
"Despite its innovativeness in taking account of off-balance-sheet assets,
the Basel III leverage ratio seems to have been set too low to be an effective
counterpart to the combination of risk-weighted capital measures that have been
agreed internationally."
After the rule has
the approval of the FDIC, it will be opened to comment. Adjustments could be
made based on comments.