Yalman Onaran and Jesse Hamilton at Bloomberg report on a new joint proposal by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency:
The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors.
The eight largest firms, including JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply.
The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.
While the authors term the new regulations “harsh” on bankers and likely to freeze bank lending, existing lax capital requirements give bankers a free ride at the expense of the taxpayer. Their claims are baseless:
- existing bank leverage is way too high for a stable financial system;
- US banks are flush with funds, holding more than $1.8 trillion in excess reserves on deposit with the Fed and $2.6 trillion invested in Treasuries and quasi-government mortgage-backed securities, so talk of a lending freeze is farcical;
- banks can function just as well with equity funding as with deposit funding;
- higher capital ratios will make it cheaper for banks to raise additional capital as lower leverage will reduce the risk premium.
So why are bankers squealing so loudly? In a nutshell: bonuses. Higher capital requirements and no free ride at taxpayers’ expense would mean that shareholders claim a bigger slice of the pie, with less left over for management bonuses.
For a detailed rebuttal of bankers’ claims see Anat Admati and Martin Hellwig.
The big four Australian banks should take note. They currently maintain between 4.1% (CBA) and 4.5% (WBC) of capital against lending exposure. Raising the ratio to 6.0% would require 33% to 50% new capital.
Read more at U.S. Banks Seen Freezing Payouts Under Harsh Leverage Rule – Bloomberg.