Regulators to Tighten Capital Requirements on Banks

Joe Goldman  |

Banking regulators took another step on Tuesday toward reducing the risks that huge banks pose toward the American economy.

Starting in 2018, JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS), Bank of New York Mellon Corp (BK), and State Street Corp (STT) will be required to hold six percent of total equity as capital, more than doubling the three percent equity capital requirement established by Basel III.

The rule would apply to banking units insured by FDIC, and regulators also proposed a five percent leverage ratio for companies that own the insured banks.

The timing of the capital requirement change is certainly a little curious. Bank executives argue that heightened regulations could stall the American economic recovery. With home prices are up tremendously over the last year, stocks trading near all-time highs, and a double-dip recession off the table for now, it would be a shame to see all this gradual progress go to waste.

However, banking regulators are taking the safe approach. With the global economy on shaky ground and domestic unemployment stubbornly high, the American economy remains somewhat vulnerable. Ensuring the big banks don’t overleverage alleviates the risk of a new financial crisis, which could be even more crippling than the one experienced five years ago.

According to FDIC Chariman Martin Gruenberg, the new requirement would create “a stronger, more resilient industry, better able to withstand environments of stress in the future.”  The change also doesn’t come into effect until 2018, which gives the banks and the financial system as a whole plenty of time to prepare for tighter capital requirements.

Additionally, according to Reuters, most of the banks currently aren’t too far away from the six percent threshold. Analysts estimate that leverage ratios are currently at 4.6 percent for Morgan Stanley, 5.1 percent Citigroup, 5.3 percent for JPMorgan, 5.7 percent for Goldman Sachs and Bank of America, and 7.5 percent for Wells Fargo.

Consequently, bank stocks didn’t fret the new rule during trading on Tuesday. With the exception of Wells Fargo, all the megabanks traded higher at Tuesday’s close.

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