Dividends could halt under new bank rule

U.S. considers 6% capital minimum

U.S. regulators are considering doubling a minimum capital requirement for the largest banks, which could force some of them to halt dividend payments.

The standard would increase the amount of capital the lenders must hold to 6 percent of total assets, regardless of their risk, according to four people with knowledge of the talks. That’s twice the level set by global banking supervisors.

U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now, the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks.

“The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”

Five of the six largest U.S. lenders, including JPMorgan Chase & Co. and MorganStanley, would fall under the 6 percent level, according to estimates by investment bank Keefe, Bruyette & Woods Inc. That means they would have to retain more of their earnings and withhold dividends to build capital. Only Wells Fargo & Co. would meet the higher standard now.

By going above the figure adopted in 2010 by the Basel Committee on Banking Supervision, the U.S. also could put pressure on Europe to affirm its commitment to the standard, which is seen as a tool to rein in risk in the financial system. Regulators in the U.K. and Switzerland told banks Thursday to increase their ratios of capital to total assets.

U.S. banks have had to comply with a simple leverage requirement of 4 percent for two decades. The new version, proposed last June, expands the definition of what counts as assets in calculating the ratio, incorporating some commitments such as lines of credit kept off balance sheets under current accounting rules. The draft is an attempt to bridge U.S. and international accounting standards.

Lenders in the U.S. and in more than 100 other countriesalready comply with Basel’s risk-based capital rules, which assign weightings to assets based on their risk. Corporate debt is given a heavier weight than government bonds, requiring that more capital be held against it. As more of the calculations shifted to complicated models designed by banks, the credibility of the risk-weightings has been challenged.

FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules entirely in favor of a simple 10 percent leverage ratio, calculated to include even more off-balance-sheet assets than allowed under Basel and define capital more narrowly.To reach Hoenig’s requirements, the three largest U.S. banks - JPMorgan, Bank of America Corp. and Citigroup Inc. - would have to stop distributing dividends for about five years, according to FDIC data and analysts’ earnings expectations compiled by Bloomberg.

The FDIC, prodded by Hoenig, is pushing for a leverage requirement higher than 6 percent, according to four people with knowledge of the talks.

The Fed has resisted going beyond that figure. The central bank is concerned that relying on a measure that doesn’t take risk into account could result in banks makingriskier investments, as they wouldn’t have to allocate more capital, one of the people said; it is studying the effect such an increase might have on bond markets and the economy.

Negotiations haven’t concluded, and the final ratio hasn’t been set, the four people familiar with the discussions said. It also hasn’t been decided which banks would be covered under the tougher rules.

Spokesmen for the Fed and the FDIC declined to comment.

While the final version of the proposal to implement Basel rules could be issued in the next few weeks, the increased leverage requirement might not be included, according to the people with knowledge of the talks. In that case, regulators would adopt the global 3 percent standard and then propose an increase later, allowing time for public comment, they said.

Business, Pages 27 on 06/22/2013

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