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FDIC Set To Decide Leverage Ratio For Big Banks

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The Federal Deposit Insurance Corporation (FDIC) is set to propose Tuesday a higher leverage ratio required to be maintained by big U.S. banks including JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc. (NYSE:C).

Federal Deposit Insurance Corporation FDIC

According to Jesse Hamilton & Yalman Onaran of Bloomberg, the FDIC could set the leverage ratio of 5 percent and 6 percent, one for parent companies and another for their U.S.-backed lending units.

The proposed leverage ratio of 6 percent is twice the international standard.

The leverage ratio could force banks to earn lower profits besides selling more assets, since a higher ratio could make U.S. banks less competitive following reduction in profit.

The leverage ratio compares a bank’s shareholder equity to its total assets without using risk-weightings. This flat ratio discourages banks from using complex formulas to hold less capital.

FDIC – New Rules to Affect Big Banks

According to the Bloomberg report, the FDIC proposal would affect the globally important banks. The Financial Stability Board has identified JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), Morgan Stanley (NYSE:MS), State Street Corporation (NYSE:STT) and The Bank of New York Mellon Corporation (NYSE:BK) as globally important.

Earlier, CNBC reported the FDIC would require big banks to maintain at least a 5 percent leverage ratio.

U.S. to Enact Rules as Part of Basel Compliance

The Basel committee’s 2010 revision on minimum capital requirements, popularly called Basel III, requires central banks to enact local regulations. The final U.S. version will be enacted after the FDIC and Office of the Comptroller of Currency sign off the proposals.

Last week, the Federal Reserve approved new rules mandating U.S. banks finance their operations with more equity, in addition to forcing compliance to tougher capital requirements. It has been reported the FDIC would unveil the more demanding leverage ratio of as high as 6 percent during this week.

Recently, FDIC Vice Chairman Thomas Hoening said the Basel III accord helps lenders to appear well-capitalized, though they are not so well-capitalized. He felt the capital rules permit banks to adopt complicated processes to determine the capital required to support their risky loans. Instead, Hoening suggested a tougher leverage ratio to measure banks’ ability to absorb sudden losses.

Additional Risk Weighting

The proposed leverage ratio would be distinct from risk weighting from Basel that would tie the amount of capital to the level of risk in a bank’s holdings. The panel set this threshold at 7 percent of risk-weighted assets.

Morgan Stanley analysts Betsey Graseck and team have expressed concern that lenders under their coverage might have to shrink their lending commitments and derivatives by about $3.23 trillion or 55 percent to conform to the 6 percent ratio by 2016.

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