U.S. Likely to Move First on Big Bank Leverage Cap

NEW YORK (The Deal) -- Federal bank regulators said Thursday it is a top priority of theirs to adopt tougher debt limits on big banks, adding that they don't expect to wait for additional moves by international policy makers before taking action.

"It is the intention of the three U.S. bank regulatory agencies to have a higher minimum [leverage] ratio than that which prevails in the international forum right now," Federal Reserve Governor Daniel Tarullo told a Senate Banking Committee hearing on financial stability. "We will independently put in a higher ratio than international standards and, as I said, for us, that ... is the top priority in the near-term."

At issue is a provision U.S. bank regulators introduced in July that, if adopted as proposed, would 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. The Basel Committee on Banking Supervision adopted a new framework in January leaving a 3% level in place as a minimum standard, but adding tougher rules about how big banks must calculate their ratio including by, for example, producing a stricter treatment for credit derivatives.

Regulatory observers point out that the Basel Committee may still expand its leverage restriction on big banks, driving policymakers in European jurisdictions eventually to hike their bank capital restrictions.

However, U.S regulators indicated Thursday that even though they intend to incorporate some of the Basel committee's methods for calculating the ratio into U.S. rules, they plan to move forward first with their overall tougher regulations regardless of what U.K. and other governments do. The three U.S. regulators responsible for the rule are the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

"I believe so [we will move first]" said FDIC chairman Martin Gruenberg. "Hopefully we will move forward quickly."

Gruenberg responded to a series of questions posed by Sen. Sherrod Brown, D-Ohio, a key bank critic whose efforts on Capitol Hill to break up the biggest financial institutions helped drive federal bank regulators to propose tougher leverage caps. Many believe that Brown has a good chance of becoming chairman of the Senate Banking Committee, should Democrats remain in control of the Senate after elections in November,

"The other way to address the issue of too-big-to-fail banks is the supplemental leverage ratio," Brown said, after expressing concerns about a system regulators are working on that seeks to dismantle a large global bank in a way that does not send shockwaves through the markets. "It's time that regulators take action to implement higher leverage standards. It's been more than six months since federal regulators announced a plan to increases leverage ratios for banks and today, our financial system is no safer from the threat of a megabank failure."


Proponents of a stronger U.S. cap argue that a tough leverage limit is a way to ensure big banks have sufficient capital cushions so that any future financial problems they might experience won't spread havoc throughout the global economy as many over-leveraged banks did during the 2008 financial crisis. Opponents contend that the cap proposal under consideration in the U.S. would hamper bank lending, hurt the economy and put U.S. institutions at a global competitive disadvantage as other jurisdictions impose weaker leverage limits.

Thomas Curry, the comptroller of the currency, said he agreed with Gruenberg's comments on timing, adding that "his own view" was that U.S. bank regulators should adopt both changes to the calculation methodology and the final rule at the same time and do it as quickly as possible. "It is a high priority for me at the OCC," he said.

Tarullo also indicated that regulators are close to proposing a new, but expected, proposal that would require big banks to issue a form of long-term unsecured debt, which can be used to recapitalize an institution as part of its restructuring so that its collapse doesn't cause systemic harm to the U.S. and global economy as Lehman Brothers' did when it filed for Chapter 11 in 2008. He also indicated that regulators are not likely to weaken a so-called liquidity coverage ratio proposal, which would require big banks to hold certain amounts of high-quality liquid assets such as central bank reserves and high-quality government and corporate debt. These reserves, Tarullo said, should be easily converted into cash over a short-term stressful period.

"While minimum capital requirements are designed to cover losses up to a certain statistical probability, in the event that the equity of a financial firm is wiped out, successful resolution without taxpayer assistance would be most effectively accomplished if a firm has sufficient long-term, unsecured debt to absorb additional losses and to recapitalize the business transferred to a bridge operating company," he said.

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