UPDATE 2-Big US banks face tougher lending rules than global rivals
WASHINGTON, July 9 (Reuters) - The eight biggest U.S. banks will need to hold twice as much equity capital as required globally under a new plan proposed by regulators on Tuesday intended to protect taxpayers from any future costly bailouts.
The rule would impose a so-called leverage ratio, a hard cap on how much banks can borrow to fund their business, requiring them to hold equity capital equal to 6 percent of total assets.
The global capital accord known as Basel III, named after the Swiss city that is home to overseer Bank of International Settlements, set a leverage ratio of 3 percent, which 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," said Martin Gruenberg, who heads the Federal Deposit Insurance Corp, a regulator that guarantees U.S. bank deposits.
The banks would have until January 2018 to meet the new requirement. FDIC staffers said it should not be difficult for the megabanks to hit the targets, but bank groups warned on Tuesday that the heightened levels could restrict lending and harm the economic recovery.
Banks balked last week, when the Fed laid out plans for future rules that will further rein in Wall Street, including a capital surcharge for the biggest banks.
The eight banks subject to the new 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.
Forcing banks to draw more funding from equity capital and rely less on borrowed capital has been a pillar of regulators' efforts to make the lenders sturdier after the devastating 2007-2009 financial crisis.
Under Basel III, which is being adopted across the world, banks must ramp up their capital buffers, but reform advocates and some U.S. politicians have pressured regulators to do more, saying the global rules can easily be gamed.
That is because Basel III allows banks to measure the risk in loans and exposure in other complex financial instruments by using their own mathematical models. A leverage ratio does not allow such risk weightings.
The 6 percent ratio covers the banking units insured by the FDIC, one of the three regulators that proposed the rule.
The regulators also proposed a leverage ratio of 5 percent for holding companies that own the insured banks and also include far more risky investment banking activities.
Sheila Bair, a former head of the FDIC who now leads the think tank, Systemic Risk Council, applauded the move to tougher leverage constraints. But she said the weaker requirements for bank holding companies were disappointing.
"Weaker capital rules for securities and other nonbank affiliates were a source of system instability during the crisis," Bair said in a statement. "We hope the regulators will strengthen and align bank holding company capital requirements with those applicable to banks before finalizing these rules."
An FDIC staffer said almost all of the big banks are expected to meet the 5 percent ratio by the end of 2017, suggesting the rule won't force banks to engage in sudden share sales.
Banks can boost their leverage ratio by raising equity - for instance by retaining earnings - or reducing exposure to loans or other assets. Estimates for the ratios vary, depending on what analysts factor into the equation, making it difficult to determine exactly how closely banks adhere to the targets.
Before the FDIC proposal came out, analysts, on average, estimated leverage ratios at 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.
'HARDER FOR BANKS'
Tim Pawlenty, president of industry group Financial Services Roundtable, said the proposal could harm the larger economy and the competitiveness of U.S. banks.
"... This new proposal, combined with existing capital and leverage requirements, will make it harder for banks to lend and keep the economic recovery going," Pawlenty said.
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 regulators will now collect comments from the industry, and then adopt the rule later, after possibly tweaking.
The OCC and the FDIC also adopted a final rule to introduce the Basel III capital accord, following a similar decision by the Fed last week.