The proposed supplementary leverage ratio requirement goes beyond those approved by the Basel Committee on Banking Supervision in 2010 and has drawn criticism because it provides no incentive for U.S. banks to hold less risky assets. The Basel rules require a leverage ratio with a 3% minimum of equity to assets, allowing banks to decide whether certain loans or securities are risky and require more equity to cover a potential default.
By contrast, the U.S. supplementary leverage ratio has higher absolute capital requirements and weighs a government bond for capital purposes in the same manner as a risky commercial loan. It also counts off-balance sheet exposures such as the grossing-up of derivatives toward a bank's capital requirements. Despite this -- and cries of foul play from U.S.-based SIFIs -- ratings agencies such as Fitch have characterized the leverage ratio as "tough but manageable" by the proposed 2018 effective date.
Some observers believe that additional capital levies might prompt some U.S. SIFIs to push into riskier areas as they seek higher returns. Killian argues that banks may also focus on business areas that do not require much capital support such as operations and payment processing.
Skeptics note that reorienting a business model toward processing may be challenging given it is a capital-intensive, commoditized business that has already consolidated. Among those that dominate the financial processing business are Bank of New York Mellon (BK), JPMorgan Chase and State Street.More broadly, Spencer notes that new regulatory and capital requirements have already slashed returns on equity for large banks -- risking their appeal to investors if returns fall much further. "For
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