Stephanie Armour and Ryan Tracy discuss the new leverage ratio that the eight biggest US lenders will be required to meet:
The eight bank-holding companies would have to hold loss-absorbing capital worth at least 5% of their assets to avoid limits on rewarding shareholders and paying bonuses, and their FDIC-insured bank subsidiaries would have to keep a minimum leverage ratio of at least 6% or face corrective actions. That is higher than the 3% agreed upon under global standards, which U.S. regulators have seen as too weak.
[FDIC Chairman Maurice] Gruenberg said leaving the leverage ratio at 3% for large banks “would not have meaningfully constrained leverage during the years leading to the crisis.” He said the rule “may be the most significant step we have taken to reduce the systemic risk posed by these large complex banking organizations.”
Banks are pushing back against the new ratios required by the Fed, FDIC and the Office of the Comptroller of the Currency.
Banks have balked at the leverage ratio, saying it will curtail lending and saddle them with more costs that leave them at a competitive disadvantage against foreign banks with lower capital requirements. Banks will have to hold that capital as protection for every loan, security and asset they hold, not just those deemed risky.
As a general rule, share capital is more expensive than debt, but that may not be the case with highly leveraged banks if you remove the too-big-to-fail taxpayer subsidy. Improved capital ratios would lower the risk premium associated with both the cost of capital and the cost of debt, offering a competitive advantage over foreign banks with higher leverage.
I would like to see APRA impose a similar minimum on Australia’s big four banks which currently range between 4% and 5%.
Read more at Big Banks to Get Higher Capital Requirement – WSJ.com.