Federal Agencies Want to 'Squeeze' TBTF Banks

July 10th, 2013
in econ_news, syndication

Econintersect:  Last week we reported on the statement by Fed Governor Daniel J. Turullo regarding the Fed intention to establish tighter reserve requirements (lower leverage limits) for the largest U.S. banks.  The standards would be tighter than required for smaller banks which would be held to the international standards known as Basel III.  The tighter standards, which Tarullo had been proposing for some time (see 05 June article), would apply to the seven largest U.S. banks as things stand today.  Details of the proposed capital rules were announced Tuesday 09 July jointly by the Federal Reserve Board of Governors, the FDIC (Federal Deposit Insurance Corporation) and the OCC (Office of the Comptroller of the Currency).


Follow up:

The higher capital requirements for TBTF (too big to fail) or systemically important banks would presumably give smaller banks some operational advantages and might put pressure on the giants to self-restructure into a larger number of smaller banks for operational efficiency.  This would please the many critics who have argued that TBTF should mean TBTE (too big to exist).

At this time the eight largest U.S. banks would fall under the stricter rules.

Here is the joint press release from the three agencies (emphasis added by Econintersect):

Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
For immediate release
July 9, 2013

Agencies Adopt Supplementary Leverage Ratio Notice of Proposed Rulemaking

The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) on Tuesday proposed a rule to strengthen the leverage ratio standards for the largest, most systemically significant U.S. banking organizations.

Under the proposed rule, bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent. Failure to exceed the 5 percent ratio would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions. In addition to the leverage buffer for covered BHCs, the proposed rule would require insured depository institutions of covered BHCs to meet a 6 percent supplementary leverage ratio to be considered "well capitalized" for prompt corrective action purposes. The proposed rule would currently apply to the eight largest, most systemically significant U.S. banking organizations.

Also on Tuesday, the FDIC Board approved a capital interim final rule and the OCC approved a final capital rule identical in substance to the final rules issued by the Federal Reserve Board on July 2, 2013.

A strong capital base at the largest, most systemically significant U.S. banking organizations is particularly important because capital shortfalls at these institutions have the potential to result in significant adverse economic consequences and contribute to systemic distress both domestically and internationally. Higher capital standards for these institutions will place additional private capital at risk before the federal deposit insurance fund and the federal government's resolution mechanisms would be called upon, and reduce the likelihood of economic disruptions caused by problems at these institutions.

The agencies are proposing a substantial phase-in period for the rule with an effective date of January 1, 2018. The NPR will be published in the Federal Register with a 60 day public comment period.

Attachment: Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository Institutions (PDF)

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