The Federal Reserve Board, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released new rules on April 8, 2014. According to the agencies, maintenance of a strong base of capital among the largest, most interconnected U.S. banking organizations is particularly important because capital shortfalls at these institutions have the potential to result in significant adverse economic consequences. As the chairman of the FDIC, Martin Gruenberg, said, “In my view, this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations.”
The final rule, which goes into effect Jan. 1, 2018, applies to U.S. top-tier bank holding companies with more than $700 billion in consolidated total assets or more than $10 trillion in assets under custody and their insured depository institution (IDI) subsidiaries.[1] In an effort to prevent another financial crisis, the new rules would limit banks’ ability to rely on debt. Instead, banks will need to rely more on other funding sources such as shareholder equity. The agencies’ intent is to strengthen the leverage ratio standard that is calculated as a percentage of a bank’s total assets. Prior to the rule change, banking organizations were required to maintain a 3 percent ratio of top-tier capital to total assets. Now, the affected bank holding companies must maintain a 5 percent ratio and their IDI subsidiaries must maintain a 6 percent ratio.
In addition to the new final rule, the agencies proposed new rules, applicable to all banks, that adjust the way banks tally assets under those leverage rules. Combined, the proposed and final rules will require the big banks to boost their capital levels by around $68 billion. In turn, the banks’ IDI subsidiaries must boost capital holdings by a total of about $95 billion. Most banking organizations that are affected by the rule are already on track to meet these standards. In fact, according to Scott Alvarez, the Fed’s general counsel, the 18 biggest banks have already boosted top-tier capital levels by more than $500 billion since 2008.
While the banks obviously object to these new rules because they have to build up their assets to satisfy them, having a stronger financial base in the United States banking system would make a collapse, like the one from 2007-2009, less likely. A better leverage ratio simply means that the banks have a better cushion to continue to pay their obligations when faced with difficult financial times. If you need additional information on this subject, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
Sources: Reuters and www.fdic.gov
[1] Those eight banking organizations are: JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.
