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US banks need $95 billion more capital by 2018. A new federal rule will raise the leverage ratio – a bank’s capital versus its total assets – to a minimum of 5%, while all FDIC-insured banks will see their ratio rise to 6%.
When the rule takes effect, the US will have a higher capital requirement than theinternational Basel III agreement’s 3%. Dealbook’s Peter Eavis says the leverage ratio is a “more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking”. The FT’s Gina Chon and Tom Braithwaite point out that the rule “does not allow banks to use their own models” (cough, risk-weighted rules, cough).
Matt Levine digs into the method for calculating leverage ratio and finds it’s actually more than just capital divided by total assets. But he thinks that’s a good thing, because bankers should be continuously confronted and terrified by the inchoate, contingent businesses they are trying to manage.
Tim Pawlenty, head of bank trade group the Financial Services Roundtable, isn’t happyabout new divergence between US and international rules: “This rule puts American financial institutions at a clear disadvantage against overseas competitors”.
Jim Pethokoukis thinks banks and their lobbyists should stop complaining. The rule change, he says, isn’t that drastic – “megabanks could borrow only 95% of money they lend versus 97% under Basel” – and could lead to a virtuous cycle where better-capitalized banks are less risky, less risk leads to lower return expectations from shareholders, and lower return expectations from shareholders makes bank take fewer risks.
Finding more over the next four years probably won’t be too hard, says Matthew Klein. He points out that the banks in question had about $80 billion in profits in 2013. Retaining one out of every four dollars earned between now and 2018 would make up the capital gap without any new equity raises.
Bloomberg View’s editors – approvingly linking to Anat Admati and Martin Hellwig’s call for equity in the range of 20% to 30% of assets – think more equity is good, but even more would have been better: “Erring on the high side would be prudent. The point isn’t that banks should avoid taking risks; taking risks is their business”. When all loans are risky loans, and banks seem to have a problem knowing exactly how risky, having more capital is the most effective way to avoid a blowup. – Ben Walsh
On to today’s links: