The Federal Reserve has decided to delay imposing limits on leverage at eight of the biggest U.S. financial institutions until a global agreement is completed, according to two people briefed on the discussions.
Fed officials want to wait for a finished rule from the Basel Committee on Banking Supervision before completing their own requirement for how much capital U.S. banks must hold as a percentage of all assets on their books, said the people, speaking on condition of anonymity because the process isn’t public. The international accord is shaping up as weaker in some respects than the U.S. plan.
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency had favored finishing a U.S. rule by year’s end, said one of the people. The Fed’s wait-and-see position is aligned with groups representing the banking industry, who have argued for a delay on grounds that the regulations should be consistent.
After the Dec. 10 adoption of the Volcker Rule that restricts banks from trading with their own money, the leverage ratio is one of the most significant unfinished U.S. initiatives to reduce risks that led to the 2008 global credit crisis.
In July, the three U.S. regulatory agencies issued a preliminary rule that would set higher caps for eight of the largest U.S. banks including JPMorgan Chase & Co. and Bank of America Corp. than those proposed by Basel. It would require a capital-to-assets ratio of 5 percent for holding companies and 6 percent for their banking units, above the 3 percent overall leverage ratio in the Basel plan.
“We have something that’s been out,” FDIC Vice Chairman Thomas Hoenig said of the three-agency U.S. leverage proposal in an interview last month. “We should, in fact, implement it.”
When agencies are working together on a rule, the timing can be affected by any one of them because they typically aim for a joint release. Eric Kollig, a spokesman for the Fed, Andrew Gray, an FDIC spokesman, and Bryan Hubbard, a spokesman for the OCC, declined to comment.
Stefan Ingves, Basel committee chairman, has said the body could finish work on its leverage plan by early next year.
Fed Chairman Ben Bernanke said today at a Washington press conference that he expects the U.S. rule will be done “fairly soon,” and said it was part of a “much stronger capital-oriented drive at this point to strengthen our financial system.”
Global regulators have met for almost 40 years in Basel, Switzerland, to negotiate common standards for supervising the banking system. After the 2008 crisis, the body produced a new round of capital rules -- known as Basel III -- to be adopted by more than two dozen member nations in an effort to rein in excessive risk-taking by institutions that are increasingly global and complex.
Basel III, approved by U.S. regulators in July, included standards for how much capital banks must have against investments in specific financial products. Related efforts still under way in the U.S. include requirements for banks to hold easy-to-sell assets and to get a minimum amount of funding from sources unlikely to dry up in a crisis, as well as capital surcharges based on the size and complexity of a bank.
While Basel III’s leverage ratio of 3 percent is unlikely to change, the Basel committee continues to work on the details of what kinds of assets will count toward that calculation. Including more off-balance-sheet assets could make the capital demand higher for big banks, according to a July memo to clients from Davis Polk & Wardwell LLP.
The financial industry has criticized the U.S. standards as too high. They “would effectively require much more capital to be held for banks’ least risky assets,” according to an Oct. 21 comment letter to regulators from the American Bankers Association, Financial Services Roundtable and the Securities Industry and Financial Markets Association.
Going ahead of Basel is “putting the cart before the horse,” according to the letter. “Any final calibration should be set at an international level to ensure global consistency.”
Blackrock Inc. Chief Executive Officer Laurence D. Fink said last week that he was “alarmed” by the number of restrictions regulators are placing on the ability of banks to take risks. The rules could reduce lending and harm the economic recovery, he said.
“There’s a possibility we’re going to be going too far with leverage ratios,” Fink said during a webcast organized by Blackrock.
Whatever the final U.S. rule says, regulators should wait for the international compact, said Wayne Abernathy, an executive vice president at the banker’s association.
“Rather than trying to do this work twice, let’s see what comes out of the Basel agreement first,” Abernathy said in an interview. If the U.S. proceeds on its own, it could be “doubling down on the same territory,” he said.
The FDIC’s Hoenig said in the interview that it wouldn’t be a drawback for U.S. regulators to go first as long as they are “open-minded” about considering Basel’s version later.
As proposed, the U.S. rule would apply to firms with assets exceeding $700 billion or that hold more than $10 trillion of customer assets -- a group also including Morgan Stanley, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp.
Citigroup Chief Financial Officer John Gerspach and Brian Leach, its head of franchise risk and strategy, said in an October letter to regulators that the leverage standards could put U.S. banks “at a competitive disadvantage, exacerbating an already uneven playing field for U.S. financial institutions.”
While Gerspach has said that Citigroup already meets the proposed capital demands, analysts at Goldman Sachs said in a July report that the capital shortfall at all the banks could approach $98 billion -- a gap the report said banks are capable of bridging within three years. Among holding companies, Morgan Stanley and BNY Mellon had the most ground to make up, according to the report.
The Fed’s decision to wait for Basel comes amid a change in leadership at the central bank. Janet Yellen, currently the vice chairman, will replace Ben Bernanke as chairman if her appointment by President Barack Obama is confirmed by the Senate in a vote expected this week. Bank of Israel Governor Stanley Fischer is Obama’s leading candidate to become vice chairman, people familiar with the selection process said.
Yellen said at her Nov. 14 Senate confirmation hearing that the leverage rule will make “a meaningful difference” and should be done “in the months ahead.”
She said boosting the leverage limit is part of a “belt-and-suspenders kind of approach in which we have a leverage requirement that serves as backup because there are potential issues with risk-based capital requirements.”
Fischer said on Aug. 21, 2009 that the global banking system may need “radical restructuring” to avoid future financial crises. He said policy makers should consider stopping banks from growing too large.