The FDIC on Tuesday will propose a leverage rule requiring big banks to have common equity equal to at least 5 percent of their assets—stricter than the international banking regulations known as Basel III, noted in CNBC.
We have shown the scenario analysis in the article “Basel III Requirements: A Look at Largest Banks by RBC” dated July 2, 2013 highlighting leverage ratio (3% to 6%) for the four largest banks, as well as Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS).
Why is This Leverage Cap so Important?
Jaret Seiberg, analyst at Guggenheim Partners in Washington, says the new leverage limit could force banks to hold capital beyond what the Basel III risk-weighting system would produce. However, Seiberg cautions against assuming that the market will get answers at Tuesday’s meeting to all of its questions.
“We are likely to get a framework for the new leverage ratio but not all the details on how it will work,” he said.
Asset Number Includes Off-balance-sheet Items
The asset number includes off-balance-sheet items and will not be adjusted for riskiness. The proposed rule for so-called “simple leverage” is 2 percent higher than the minimum simple leverage rule under Basel III.
The leverage rule is intended to ensure that banks have enough capital to weather a severe downturn, like the one in 2008. Banks have argued that the leverage rules will cut into their lending by limiting the amount they can borrow to fund loans. By piling off-balance-sheet items into the ratio, the regulators have made banks’ capital burdens much heavier.
Leverage Rule – Impact on the Nation’s Six Biggest Banks
Analysts disagree over the impact the limit could have on the nation’s six biggest banks. However, they all agree that Wells Fargo would be in the best shape and won’t be expected to raise funds.
Some of the other big banks – if not all of them – may need to raise capital or divest assets to meet a 5% ratio. Other banks that could be affected include Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs Group Inc (NYSE:GS) and Citigroup Inc (NYSE:C).
Proposal Has Two Components
MarketWatch noted that the proposal privately under consideration would have two components: It would require the biggest federally insured commercial banks to hold 6 percent of their total assets in capital as part of a leverage ratio, twice that agreed to in the Basel III accord. The commercial banking subsidiaries within those holding companies would encounter an even tougher, 5 percent limit.
However, everyone agrees it will be tougher than a leverage limit included in the global agreement known as Basel III.