Banks will have to come up with more money to prove to regulators they’re safe. Others may still not be convinced.
U.S. bank regulators on Tuesday officially upped the amount of excess assets the nation’s eight largest banks must hold to cover potentially bad loans or soured investments. In a memo, the Federal Reserve estimated that the new rule would force the banks to raise $68 billion by the end of 2017, when the rule would go into place. The rule was jointly approved by the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency.
The Fed specifically cited “too big to fail” as one of the reason it thought the largest banks should be required to hold more capital. The Fed has recently released a number of studies that suggest the largest banks in the U.S. get an unfair advantage, though not as large as some think.
Regulators have been tinkering with bank capital requirements for the past few years, and they have already set the amount of money that banks have to hold to cover potential losses from their riskier loans and investments. The new rule sets the so-called leverage ratio at 5% of all banks’ loans and investments, which is less than the ratio of excess assets banks must hold against their riskiest loans.
International rules require large banks to have a leverage ratio of 3%. So the U.S.’s new 5% rule is stricter. But it’s down from the 6% that regulators were considering a year ago. And it’s still far less than the 15% that some bank critics have called for.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.