New Capital Standards Will Rein in Too-Big-To-Fail Banks

By Charles H. Green

Last week the three federal bank regulators approved a simple rule that could do more to rein in Wall Street banks 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 OCCratio, 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.

Under the rule, banks with over $700 billion in assets will have to raise their capital, measured by the leverage ratio, to 5 percent of their overall assets. The ratio will have to be 6 percent at the banks’ federally insured banking subsidiaries, where many of their riskiest activities are. These new rules are more stringent to the risk-based asset procedures that are more prone to manipulation.

What do these changes mean for business lenders? Probably a more stable economy and improved confidence in banking. Paring back the risk poised by the too-big-to-fail banks is a positive development, albeit that these changes are not effective until 2018.

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