U.S. regulators may set two separate capital standards for the largest banks, one for parent companies and another for their government-backed lending units, said a person with knowledge of the matter.
One leverage ratio would set capital at 6 percent of assets and the other would be 5 percent under the joint proposal scheduled to be published tomorrow by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, the person said.
The person, who asked for anonymity because the information hasn’t been made public, didn’t specify which levels would apply to the parent or lending unit. The global standard is 3 percent.
Regulators are raising ratios for the eight largest U.S. banks as part of an international effort to prevent another crisis like the one in 2008 that almost destroyed the financial system. The leverage ratio represents a firm’s cushion against losses when loans and other investments sour.
The FDIC plans to vote on the thresholds tomorrow in Washington. Spokesmen for the three banking regulators declined to comment or didn’t respond to inquiries.
Letting holding companies meet a lower leverage requirement than their lending units could help New York-based Morgan Stanley (MS), owner of the world’s largest brokerage, which keeps most of its derivatives contracts at the parent company. Other institutions hold almost all their contracts at banking units insured by the FDIC.
Five of the six largest U.S. lenders, including No. 1-ranked JPMorgan Chase & Co. (JPM), would fall under a 6 percent level at the holding company level, according to estimates by Keefe, Bruyette & Woods Inc. last month. KBW hasn’t calculated how they would fare under a separate ratio for the banking units.
KBW had estimated Morgan Stanley’s holding company leverage ratio to be 3.8 percent under new global rules.
The international standard was set at 3 percent in 2010 by the Basel Committee on Banking Supervision. The group of central bankers and regulators also compelled banks to count some off-balance-sheet assets that previously were left out, a change that drives up the amount of capital needed.
Unlike the system that now prevails, the new leverage ratio doesn’t give banks a break for less-risky holdings. Some of the largest banks have been allowed to provide their own estimates of how perilous their holdings were, a system known as risk-weighting. As doubts arose about the accuracy of those calculations, U.S. regulators came under pressure to go beyond the Basel minimum.