Federal Reserve officials are weighing a stricter cap on bank leverage, a move that would respond to increasing demands to constrain the riskiness of large lenders.
According to people familiar with the matter, Fed officials have discussed increasing the amount of equity capital banks are required to hold, setting the bar higher than the 3 percent of assets level agreed internationally.
The move is being considered amid growing skepticism about the Basel III capital accords, which impose higher capital requirements on banks around the world but allow them to vary the amount depending on the riskiness of individual assets. Officials are concerned that some banks are gaming the system.
However, critics of a higher leverage ratio argue that it is a blunt tool that makes no distinction between safe securities, such as U.S. Treasurys, and risky assets such as leveraged loans, and could result in banks taking on more risk.
In Congress, a proposal to impose a 15 percent leverage ratio on the largest banks has secured bipartisan support. Analysts calculate it would require the likes of JPMorgan Chase and Bank of America to forego dividends for years to retain a total of $1.2 trillion of equity.
Few regulators want to go so far, with many believing it would harm the financial sector and curb lending. Any increase would also reduce profitability.
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But some senior Fed officials believe a higher ratio could be justified as a backstop to the risk-based Basel requirements.