European regulators such as Bundesbank Vice President Sabine Lautenschlaeger have said the leverage ratio shouldn’t be the main gauge because it doesn’t demand more backing for loss- prone investments and thus can give bankers “unhealthy incentives” to take on more risk. Bair and other advocates say the leverage ratio works as a strong backstop when used along with risk weighting.
Five of the six largest U.S. lenders, including No. 1- ranked JPMorgan, would fall under a 6% level at the holding company level, according to estimates by Keefe, Bruyette & Woods Inc. last month. Only Wells Fargo and Bank of America would meet the 5% holding company requirement, according to KBW estimates. KBW didn’t say how they would fare under a separate ratio for the banking units.
The enhanced leverage requirement would also cover BNY Mellon and State Street. Those two would also fall below the 5% level proposed today, according to KBW estimates.
“U.S. regulators have upped the ante on bank capital, making the leverage ratio a significant constraint for large banks here and daring the rest of the world to match,” said Frederick Cannon, director of research at KBW.
Hitting the ratio targets will be easier if safer assets such as cash and government debt are exempted, something bankers say would be fair since those holdings aren’t likely to sour and have less need for a backstop. Without the exclusion, Morgan Stanley and BNY Mellon have the lowest ratios of capital to assets, Goldman Sachs analysts estimated in a report last month.
Getting rid of assets may be one way that banks seek to improve their ratios, according to Patrikis.
Bank of America, the second-largest U.S. lender by assets after New York-based JPMorgan, has sold more than $60 billion of holdings since 2010 as Chief Executive Officer Brian T. Moynihan sought to rebuild the Charlotte, North Carolina-based company’s balance sheet following a $45 billion bailout during the financial crisis.