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The Deal: U.S. Banks Face Tougher Capital Mandate Than Global Rivals

"If Basel III had a fundamental purpose -- and we certainly criticized its details -- it was to create a basic global standard that would end international competition over capital levels," he said. "This proposal goes beyond Basel III to impose a more difficult standard on our nation's internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans -- including loan commitments and derivatives that hedge risk -- more expensive to offer. Raising capital is not without cost -- it means higher funding costs for loans and that fewer loans will be made."

Added William Sweet, head of the Financial Institutions Regulation and Enforcement Group at Skadden, Arps, Slate, Meagher & Flom: "The FDIC adopted an entirely domestic leverage requirement above and beyond Basel III. It appears the leverage capital ratio at the eight U.S. globally systemically important banks will increase somewhere between 100% to 66%, compared to what the Basel Committee put in place."

FBR Capital Markets analyst Edward Mills said the new capital requirements would shift the balance of power from banks to regulators around capital decisions by setting an objective standard. "Many regulators felt that at the heart of the capital crisis, banks were reluctant to cut their dividends which may be seen as a sign of weakness but returned capital they could have used to better weather the crisis," he said.

Mills suggested major banks were likely to meet the requirements by the time they took their phased-in effect. But he pointed to the FDIC board meeting transcript, which estimated that covered bank holding companies would have needed to increase their Tier 1 capital by about $63 billion to achieve a 5% supplementary leverage ratio if that requirement had been in effect as of third quarter of 2012. The agencies also estimated that the lead insured banks of these organizations would have needed to increase their Tier 1 capital by about $89 billion, to achieve a 6% supplementary leverage ratio.

Rafferty Capital Markets bank analyst Richard Bove said the new requirements were the result of a longstanding rift between the FDIC and the Federal Reserve. He noted that the Fed preferred to follow global Basel standards while the FDIC believed these allowed banks to "cheat" as they did not require capital holdings against cash or Treasuries. "The [FDIC] wanted a different capital ratio which encompassed all assets and neither [party] wanted to change their position, so now we have two sets of capital requirements," Bove said.
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