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ICBA voices support for enhanced supplementary leverage ratio standards

ICBA logoThe Independent Community Bankers of America expressed support last week for a proposal to require higher supplementary leverage ratio capital standards for the nation’s largest financial institutions.

Regulators have set leverage ratio standards at five percent for holding companies and six percent for their banking units, targeting banks with the most assets as part of an effort to limit risks to the financial system—a more stringent proposal than originally agreed to in Basel III capital accords, Bloomberg reports.

The ICBA said the proposal would help eliminate the nation’s “too-big-to-fail” problem.

“This proposal is a big step in requiring these too-big-to-fail megabanks to have sufficient capital available to absorb the losses that will accompany any future financial crisis and shift the burden of megabank bailouts from taxpayers to shareholders,” the ICBA said in a letter. “Introducing these higher capital measures properly addresses the risks associated with these oversized financial institutions and their global interconnected dependencies.”

The levels would apply to bank holding companies with $700 billion or more in total consolidate assets or more than $10 trillion in assets under custody—essentially, the nation’s largest eight financial institutions.

Citigroup and U.S. Bank said in comment letters that the proposal could worsen the already uneven playing field for American banks. State Street Corp. said the regulators showed “no evidence” that they studied the possible impact on banks, according to Bloomberg.

Other groups, including Americans for Financial Reform, Clearing House Association, American Bankers Association, Securities Industry and Financial Markets Association and Financial Services Roundtable have also voiced concerns about the proposal.

“The prospect of an excessive, overriding leverage ratio would effectively require much more capital to be held for banks’ least risky assets, such as cash,” the ABA, FSR and SIFMA said in a comment letter, Bloomberg reports.

Comment letters also voiced concern that the proposal will have far-reaching consequences past the eight banks it was supposed to directly affect.

“It would potentially create incentives for organizations to hold higher-yielding, higher-risk assets, which likely would lead to a distortion of how the market prices these higher-risk assets,” Capital One, PNC Financial and SunTrust Banks said in a comment letter, according to Bloomberg. “Even institutions that are not subject to the enhanced leverage ratio requirement would feel the impact of changes to asset pricing.”

The ICBA said, however, that raising the leverage ratio requirements would make TBTF institutions less likely to fail and would discourage growing even bigger.

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