WASHINGTON Federal Deposit Insurance Corp. Chairman Martin Gruenberg on Monday sought to bolster the case for a U.S. leverage ratio for big banks that goes further than one supported in other countries.
Speaking at American Banker's 3rd Annual Regulatory Symposium, Gruenberg said the 3% supplemental leverage ratio requirement instituted by the international Basel Committee on Banking Supervision was a "significant new standard," but that it still fell short of what the FDIC and other U.S. regulators felt would have been adequate. In July, the FDIC and two other agencies proposed a 5% supplemental ratio for the largest U.S. companies.
"Analysis by the agencies suggests that a 3% minimum supplementary leverage ratio would not have appreciably mitigated the growth in leverage among these organizations in the years preceding the financial crisis," Gruenberg said. "The FDIC viewed this as problematic because one of the most important objectives of the capital reforms was to address the buildup of excessive leverage."
The higher leverage ratio proposed in July by the FDIC along with the Federal Reserve Board and the Office of the Comptroller of the Currency would apply to the eight U.S. financial companies designated by the Basel Committee as "globally systemically important banks" or G-SIBSs. Under the U.S. proposal, the insured depository institutions of those firms would face a required 6% minimum leverage ratio.
Among the institutions that would be subject to the new requirement are Citigroup, JPMorgan Chase, Bank of America, and Goldman Sachs. The 5% supplemental ratio would be in addition to a 4% leverage ratio for all banks that was already finalized as part of the Basel III package this summer.
Gruenberg said in deciding to propose the higher leverage ratio requirement, U.S. regulators sought to maintain the "complementary relationship" between risk-based capital requirements, which is used to absorb losses during periods of high stress, and a leverage requirement, a tool often used as a back-stop mechanism. He noted that the approach favored by international regulators in the Basel III package "increases risk-based capital requirements significantly more than it increases leverage requirements."
"Without a corresponding increase in the leverage requirement, there is a risk that these institutions could employ strategies that may increase their leverage to imprudent levels," said Gruenberg.
All eight U.S. bank holding companies, collectively, will have to shore up an additional $89 billion in capital to meet the higher leverage requirement, while their insured subsidiaries will have to fill a shortfall of $63 billion to meet the proposed 6% leverage requirement.
Regulators spent part of the summer haggling over how to increase the leverage ratio. Despite the FDIC's lead, Gruenberg noted during the question-and-answer session that all three banking regulators were on the same page in making improvements to the requirement.
FDIC board members, including Vice Chairman Thomas Hoenig and Jeremiah Norton, called for a significantly higher leverage ratio than the one previously proposed by regulators in June 2012.