U.S. regulators on Tuesday launched a plan to force the country's largest banks to hold twice as much equity capital as required globally and protect taxpayers against any future costly bailouts.
The proposed new rule would subject the country's eight largest banks to a hard cap on how much they can borrow to fund their businesses. It imposes a so-called leverage ratio that would require them to hold equity capital equal to 6 percent of total assets, regulators said.
At a holding company level, which includes investment banking units not guaranteed by the Federal Deposit Insurance Corp. (FDIC), the leverage ratio would be 5 percent for the eight banks.
Forcing banks to draw more funding from equity capital and rely less on debt capital has been a pillar of regulators' efforts to make them sturdier after the devastating 2007-2009 financial crisis.
Under the so-called Basel III accord banks must ramp up their capital buffers, but reform advocates and some members of the U.S. Congress have pressured regulators to do more, saying the global rules can easily be gamed.
Basel III allows banks to measure their risk with their own mathematical models, while the accord's leverage ratio, which does not allow such risk weightings, stands at 3 percent, a level critics say is unambitious.
"A three percent minimum supplementary leverage ratio would not have appreciably mitigated the growth in leverage ... in the years preceding the recent crisis," FDIC head Martin Gruenberg said in remarks prepared for a meeting.
An FDIC staffer said in the 2013 Fed stress tests, all of the banks met the 3 percent leverage ratio and almost all expected to meet the 5 percent ratio by the end of 2017.
The eight banks subject to the rules are JPMorgan Chase & Co , Citigroup Inc, Bank of America Corp, Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Bank of New York Mellon Corp and State Street Corp.
Banks can boost their leverage ratio by raising capital, for instance through retaining earnings, or by reducing their loans exposure.
Before the FDIC proposal came out, the average of eight analysts' estimates for leverage ratios was 4.6 percent for Morgan Stanley; 5.1 percent for Citigroup; 5.3 percent for JPMorgan Chase; 5.7 percent for Goldman and Bank of America Corp; and 7.5 percent for Wells Fargo.
The rule was proposed simultaneously by the country's three main banking regulators: the FDIC, the Office of the Comptroller of the Currency (OCC) and the U.S. Federal Reserve.
The OCC and the FDIC also adopted a final rule to introduce the Basel III capital accord, following on from a similar decision by the Fed last week.
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