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TheStreet Open House

Feds Move Forward With Tougher Bank Debt Limit

Stocks in this article: BAC WFC C GS JPM BK STT MS

NEW YORK (The Deal) -- Federal bank regulators on Tuesday moved forward with tough leverage restrictions on the largest eight U.S. banks as part of an effort to ensure they rely less on debt and have enough capital to withstand a financial crisis like the one that shook the economy in 2008.

The Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Federal Reserve voted unanimously at two separate meetings to adopt both a tough leverage limit rule and to introduce a proposal that officials say would "modestly" strengthen how the debt cap is calculated. Ultimately, observers will need to wait until the calculation proposal is adopted before the combined regulation is completed.

Regulators have some time to review and adopt the proposal because the debt restrictions don't take effect until Jan. 1, 2018.

"This final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations," said FDIC Chairman Martin Gruenberg. He added that the rules will reduce the likelihood that regulators will need to employ a special system being set up as an alternative to bankruptcy to dismantle a large failing bank so that its collapse does not cause Lehman-like collateral damage to the markets.

The move to impose tougher leverage caps comes, partly in response to pressure applied by some lawmakers on Capitol Hill, who are urging policymakers to break up the largest banks in response to the 2008 financial crisis.

Specifically, regulators adopted a rule, which was proposed in July, that require the biggest federally insured commercial banks to hold 6% of their total assets in capital as part of a leverage ratio, twice that agreed to in a 2010 global agreement on bank capital known as Basel III. Bank holding companies would need to hold 5% of their total assets in capital as part of the measure. The move is a significant improvement over the period 2006 to 2008, when there was no binding leverage ratio at all on the largest U.S. institutions.

However, regulators also voted to introduce a proposal that would add new details for how the leverage cap is calculated. Proponents say the proposal would make the leverage cap modestly tougher in aggregate if adopted however some observers contend it could ease restrictions for some banks. Regulators said they introduced it so they can incorporate a new methodology approved by the Basel Committee on Banking Supervision in January for calculating the leverage cap. The proposal is an attempt to harmonize U.S. and international rules for calculating the debt cap, even though the U.S. banks would ultimately need to hold much more capital than what the international framework requires.

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