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Banks Ordered to Add Capital to Limit Risks

“Federal regulators on Tuesday approved a simple rule that could do more to rein in Wall Street than most other parts of a sweeping overhaul that has descended on the biggest banks since the financial crisis.”

“The rule increases to 5 percent, from roughly 3 percent, a threshold called the leverage ratio, which measures the amount of capital that a bank holds against its assets. The requirement — more stringent than that for Wall Street’s rivals in Europe and Asia — could force the eight biggest banks in the United States to find as much as an additional $68 billion to put their operations on firmer financial footing, according to regulators’ estimates.”

“Faced with that potentially onerous bill, Wall Street titans are expected to pare back some of their riskiest activities, including trading in credit-default swaps, the financial instruments that destabilized the system during the financial crisis.”

“In that respect, some regulators and advocates for tougher financial regulation said, the new rule is a more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking. Capital is important to banks because it acts as a buffer for potential losses that might otherwise sink an institution.”

“It’s real, it’s tangible, it makes a difference, and improves the banks’ loss absorbing capacity,” said Sheila C. Bair of the Pew Charitable Trusts and a former chairwoman of the Federal Deposit Insurance Corporation, a bank regulator. “Many of the other rules are about controlling behavior, but there is only so much behavior you can control.”

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