U.S. Banks and Capital: Collateral Damage

The U.K.'s financial sheriff is talking tough, and his impact could easily extend as far as Wall Street.

Author:: Dan Freed
Publish date:: Sep 3, 2009 10:34 AM EDT

NEW YORK (

TheStreet

) -- The U.K.'s financial sheriff is talking tough, and his impact could easily extend as far as Wall Street.

Adair Turner, chairman of the U.K. Financial Services Authority, told both

The Wall Street Journal

and the

Financial Times

on Thursday that he wants banks to hold more capital to guard against the kind of blowups that forced the likes of

Citigroup

Bank of America

(BAC) - Get Report

and

Wells Fargo

(WFC) - Get Report

to take on the U.S. government as a major shareholder.

U.S. banks have been expected to take their cues from the Basel Committee on Banking Supervision in Switzerland, but some regulatory watchdogs fear the committee is moving too slowly. Turner told

The Wall Street Journal

that he doesn't want to wait for new capital rules to take effect in 2015 under the Basel regime. He wants "very profitable banks" to have higher buffers in place by 2012.

Turner's views are likely to find a sympathetic ear in the U.S., among many members of Congress, as well as regulators who have earned a reputation for toughness, like Federal Deposit Insurance Corp. Chairman Sheila Bair.

The prospect of higher capital rules could dampen the run-up in U.S. bank stocks that has seen shares of

JPMorgan Chase

(JPM) - Get Report

and

Goldman Sachs

(GS) - Get Report

more than double off their March lows.

Longer-term, however, tougher capital rules might be a good thing for bank shareholders. A

study

published in July by Andrea Beltratti of Universita Bocconi and Rene Stulz at Ohio State University argues that banks did better during the credit crisis in countries with stricter capital rules.

Turner's agenda goes well beyond capital rules, however. He wants to put tough rules in place on certain types of financial derivatives he decries as "socially useless." That could be especially punishing for banks like Goldman, JPMorgan and

Morgan Stanley

(MS) - Get Report

that have big businesses in complex derivatives. He also wants banks to simplify their legal structures to make it harder for them to dodge taxes, the

reported.

How much influence Turner will have internationally remains to be seen, but it is ironic that the U.K, which many believe eclipsed the U.S. in the derivatives area in the years leading up to the crisis, could now be leading the charge to clamp down on such instruments.

Written by Dan Freed in New York