CHICAGO Comptroller of the Currency Thomas Curry said Thursday that U.S. regulators should take a second look at a leverage ratio proposed under Basel III, another sign that the agencies are considering raising the standard.
"It is particularly important that we revisit the issue of the leverage ratio in the context of the Basel rulemaking," said Curry, speaking at the Federal Reserve Bank of Chicago's annual banking conference.
Curry is the latest U.S. regulator to endorse another look at the global leverage ratio, which has drawn criticism from top officials at the Federal Deposit Insurance Corp. for being too low. They argue that the leverage ratio should be higher because the current plan relies too heavily on risk risk-based capital requirements, which have proven unreliable in the past.
"We need to look at whether there is proper correlation between the risk-based capital levels and what the current leverage ratio requirement is," Curry said in speaking with reporters on the sidelines of the conference.
Curry said it's a topic under serious consideration at the OCC, but did not specify whether a higher leverage ratio would be part of a final rule implementing Basel III in the United States or might come later in the shape of additional reforms. He also did not specify how high regulators should raise the leverage ratio.
"We have a system, I think, that works well that's been adopted by Basel," said Curry. "We have a leverage ratio with a risk-based capital regime. It works as a belt-and-suspenders system and in tandem is an opportunity to be an effective regulatory tool."
Regulators have been closely examining whether to lift a proposed leverage ratio as part of a deal to finalize the implementation of Basel III's package of capital and liquidity requirements. Under the proposal issued by regulators last June, banks would have to keep a 3% leverage ratio, while the largest institutions would face an additional 3% supplemental ratio.
FDIC Vice Chairman Thomas Hoenig and Jeremiah Norton, an FDIC board member, have both made the case in recent speeches that the proposed requirement is too low.
Hoenig is calling for a 10% threshold while Norton has not offered a specific number. They both say the ratio is insufficient to protect the banking system, noting the banks held just 3% in tangible equity to total assets prior to the financial crisis.
Several analysts have suggested the FDIC, OCC and Fed are locked in negotiations over how high to boost the ratio.
Last week, Federal Reserve Board Gov. Daniel Tarullo suggested regulators should consider taking another look at the calibration of two existing capital requirements for the largest firms: the leverage ratio and risk-based capital surcharges.
"The leverage ratio kind of provides a check, or as I describe it, a complementary role in making sure that there's a limit to how much of that can be done within the confines of an existing risk-based system," Tarullo said during a question-and-answer session following a speech at the Peterson Institute for International Economics. "So that's why I describe the two as having a traditional complementary relationship."
Tarullo, who is responsible for supervision and banking at the Fed, suggested that the Basel III leverage "may have been set too low." He said regulators could beef up the requirement under rules in Dodd-Frank pertaining to the largest institutions.
But he also noted there may be several measures of capital that can be used in a "complementary framework" that could compensate for possible "shortcomings," in order to allow policymakers to contain systemic risks without impeding extension of credit and economic growth.