Jason Farrell

The Federal Reserve and Federal Deposit Insurance Corp. are considering increasing capital requirements for the country’s largest banks.

Under pressure from Congress, the regulators may require the amount of capital the lenders must hold to be 6% of total assets. The move could force the banks to halt dividend payments.

According to Bloomberg:

“Five of the six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Morgan Stanley, 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. (WFC) would meet the higher standard now…

“U.S. banks have had to comply with a simple leverage requirement of 4% for the last two decades. The new version… expands the definition of what counts as assets.”

Most of the largest U.S. banks currently fall under the 6% standard. Wells Fargo, however, holds 7.3%, according to KBW.

Regulators believe the low requirement currently in place leaves banks too deeply leveraged and thus too highly exposed to risk. “The leverage ratio is a good safety tool” says Simon Johnson, a former chief economist at the IMF, “because risk-weighting can be gamed by banks so easily.”

Brace yourself… if politicians get their way, it could get worse. A bipartisan Senate bill introduced in April would set the leverage ratio at 15%. It “would limit an institution’s ability to lend to businesses, hampering economic growth and job creation,” lobbyist Securities Industry and Financial Markets Association said then. A ratio of 10%, suggested by Thomas Hoenig, vice chairman of the FDIC, would mean JPMorgan, Bank of America and Citigroup would all “have to stop distributing dividends for about five years.”

Stocks from these banks are a part of many portfolios and mutual funds. “According to one study,” says our income analyst Neil George, “dividends and other income streams accounted for more than 50% of all realized gains in the S&P 500 over the past 28 years.”

The feds, naturally, don’t care if your nest egg shrinks. All the more reason not to depend on them.

Jason Farrell

For The Daily Reckoning

P.S. The email edition of Daily Reckoning includes much more analysis, including responses to reader comments and tweets. It’s free and easy to sign up! Just click here.

Jason Farrell

Jason M. Farrell is a writer based in Washington D.C. and Baltimore, MD. Before joining Agora Financial in 2012 he was a research fellow at the Center for Competitive Politics, where his work was cited by the New York Post, Albany Times Union and the New York State Senate. He has been published at United Liberty, The Federalist, The Daily Caller and LewRockwell.com among many other blogs and news sites.

  • Govtdoingrightforonce

    I am pretty sure that increasing the leverage ratio is the responsible thing to do, and is an example of the short term pain that everyone is going to have to go through if we are serious about trying to save the country from Obamanation. Read “The Creature from Jekyll Island” for more about how vanishing leverage ratio has screwed up the American economy (among other things). The next step is to reconnect fiat money with the gold standard, but at least increasing the leverage ratio is a step in the right direction. If we don’t want to be a bunch of “I told you soers” who smugly sit by while the country goes into the sh!tter and actually take a stand and try to save our economy, we will applaud the government doing something right for once.

  • http://dailyreckoning.com/ Daily Reckoning

    Would a gold standard reduce or end the need for a leverage ratio?

  • Govtdoingrightforonce

    Down the road, a gold standard would be the final step for an implementation of sound money policy. Firstly, however, since the U. S. Govt won’t end the moral hazard endemic to the FDIC (and now John Q. Taxpayer) basically backstopping without limit the banks’ irresponsible investments with our money, at least now, in lieu of getting rid of the FDIC and forcing banks to acquire private insurance for their investments and solvency (which would encourage fiscal responsibility and ensure accountability)they are legislating the need for fiscal responsibility with our money. More regulations are not what we need, but, like I said, in lieu of forcing accountability through private bank insurance (ie letting the private sector step in and insure the banks), the requirement for banks to be responsible with our money and up the fractional reserve requirement is definitely a step in the right direction towards making the banks accountable for their investment decisions, which as we know was one of the main problems in 2008 (and ongoing). Read G. Edward Griffin, he lays it all out for you there.

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