The U.S. is considering doubling that requirement for its largest lenders and plans to introduce another regulation to make that change, people familiar with the talks have said.
“The U.S. going beyond the internationally agreed leverage standard while Europe hasn’t even committed to it yet is the strongest sign so far that the implementation of Basel is diverging more than ever before,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm.
The Basel regime previously gave firms leeway on how much capital they must have, letting banks hold a smaller amount to back assets classified as less risky. As more of the risk calculation shifted to complicated models that the institutions designed themselves, regulators such as Sheila Bair, the former FDIC chairman, questioned the credibility of the weightings.
The leverage rule provides a backstop by setting a fixed minimum for capital, regardless of how risky bankers say their holdings might be. By going above the internationally agreed figure, the U.S. could put pressure on Europe to reaffirm its wavering commitment on the standard, analysts have said.
The EU has altered some parts of Basel III, widening the scope of what counts as capital to make it easier for its banks to reach Basel’s new minimums. When all assets are counted without risk consideration, their capital levels look much lower. The EU has wavered on the non-risk measure, saying further study is needed before committing to a binding threshold for the region’s banks.
The U.S. has translated the committee’s decision into local law with relatively few changes. The nation’s lenders had pushed for changes in calculating how quickly market values of trading assets would affect their capital levels.
They also asked regulators to soften restrictions on how much of their mortgage-servicing rights could be counted as part of the highest-quality capital. Basel III restricts such assets to 10% of capital. The U.S. kept that limit.
Completion of the rules will give the central bank leverage in international negotiations with countries that have yet to implement the rules, Tarullo said.
“Adoption of these rules means that we will have met international expectations for U.S. implementation of the Basel III capital framework,” Tarullo said. “This gives us a firm position from which to press our expectations that other countries implement Basel III fully and faithfully, thereby promoting global financial stability.”