Big US banks forced to hold extra $68bn
US regulators have held out the prospect of more draconian measures after ratcheting up capital requirements for the biggest US banks – from JPMorgan Chase to Goldman Sachs – forcing them to hold at least $68bn in additional capital. A new "leverage ratio" will force the eight largest US banks to hold a minimum of 5 per cent equity to total assets to absorb losses in a crisis and proposes adopting a more stringent way of calculating the rule. The leverage ratio is supposed to be a backstop to other capital rules that are "risk-weighted". It does not allow banks to use their own models, which some critics have warned allows institutions to game the system. It is tougher than a new international metric that requires banks to reach a 3 per cent minimum of equity to assets and potentially hinders the profitability of the eight banks affected – Bank of America, Bank of New York Mellon, Citigroup, Goldman, JPMorgan, Morgan Stanley, State Street and Wells Fargo – compared with their rivals in Europe. Dan Tarullo, the Fed governor in charge of regulation, indicated that he wanted to go further. He signalled that the Fed might impose an additional risk-based capital charge on the biggest US banks, bringing it "to a higher level than the minimum agreed to internationally" to discourage short-term wholesale funding. Investment banks such as Morgan Stanley and Goldman, which do not have the same deposit base as retail banks such as Wells Fargo, might have most to lose if Mr Tarullo succeeded in imposing an additional capital surcharge. He has highlighted the problem of bank dependence on short-term wholesale funding on numerous occasions. But his comments were a new hint at the potential severity of the regulatory response. On Tuesday, the Fed, the FDIC and the Office of the Comptroller of the Currency finalised the criteria for big banks to have a more than 5 per cent leverage ratio at the holding company level and at least 6 per cent at the bank subsidiary level. "The supplementary leverage ratio is a more reliable measure that is simpler to calculate, understand and enforce than the subjective risk-weighted measures, and it provides a highly useful initial assessment of a bank’s balance sheet strength," said Federal Deposit Insurance Corporation vice-chairman Thomas Hoenig, a strong proponent of the new rule. US regulators also said they were considering adopting the same changes to how assets in the leverage ratio are calculated as the international Basel Committee on Banking Supervision proposed in January. Banks have until January 1, 2018 to comply with the leverage ratio. Fed staff said the leverage ratio was likely to have limited effect on monetary policy, even though it could depress demand for certain low-risk, low-return assets. The Fed said that could affect interest rates or reduce liquidity in short-term funding markets, but added that the agency has a "flexible and diverse policy toolkit that can offset most, if not all, unwanted pressures".