The traditional Basel capital regime allows larger lenders to calculate the likelihood of losses using their own formulas, and thus how much capital they need. As the models became more complex and harder to understand, regulators such as former FDIC Chairman Sheila Bair questioned their credibility.
Bair, 59, pushed Basel to add the leverage ratio, a more transparent gauge that measures capital as a simple percentage of assets regardless of the risk. FDIC Vice Chairman Thomas Hoenig, who has advocated a 10 percent straight leverage ratio, yesterday reiterated his objection to the complicated formulas used to calculate risk-weighted capital ratios.
The proposed U.S. rules could push banks to shift to riskier assets, according to Jason Goldberg, a Barclays Plc analyst.
“This new heightened requirement would only impact certain U.S. institutions, potentially resulting in these banks being put at a global competitive disadvantage,” Goldberg wrote yesterday in a note. U.S. regulators probably will follow with further capital measures in coming months, he said.
Fed Governor Daniel Tarullo, who’s in charge of bank supervision, said last week that new rules would be forthcoming on how much long-term debt the largest firms would need to hold and extra capital charges on short-term funding.
Former Fed lawyer William Sweet said investors will want to see banks overshoot the bare minimum and meet regulatory demands long before 2018.
“Markets will expect the largest eight to be in conformance with this requirement well before the requirement’s deadline,” said Sweet, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington. “They do have a ways to go” before they can comfortably sustain more dividends, he said.
Hitting the new leverage ratio targets would be easier if safer holdings such as cash and government debt were excluded from the tally of assets. Bankers say this would be fair as those holdings aren’t likely to sour and have less need for a backstop. Yesterday’s proposal doesn’t grant such an exclusion.
Without it, Morgan Stanley and BNY Mellon have the lowest ratios of capital to assets, analysts at New York-based Goldman Sachs estimated in a report last month. The industry has been lobbying for the exclusions and may renew efforts to narrow the definition of assets before the rule becomes final.
“The banks will keep fighting until the last moment to soften this proposal,” Rodriguez Valladares said. “But there’s considerable political backing for tougher rules on big banks, so they probably won’t win.”