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April 9, 2014

Big Banks to Get Higher Capital Requirement

WASHINGTON—“The eight largest U.S. banks will have to add as much as $68 billion in extra capital to comply with a new rule intended to help firms weather losses during periods of market stress, federal regulators said Tuesday.”

“The so-called leverage ratio, approved by the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp., will require the largest banks to maintain well above the global minimum levels of capital held against all assets on their books, not just those deemed risky. The rule will take effect on Jan. 1, 2018, but banks must calculate and report the new levels in 2015.”

“The requirement, which will affect banks such as Citigroup Inc., C +0.97% J.P. Morgan Chase JPM +0.55% & Co. and Goldman Sachs Group Inc., GS +1.34% comes as U.S. agencies ratchet up pressure on large, complex firms to ensure they can survive periods of turmoil without a government rescue. The rule will require banks to either shed assets or raise additional cash from investors, a move that some warn could limit their growth but which regulators say will protect their ability to lend during a downturn.”

“The final rule is an important part of the board’s package of enhanced prudential standards for the most systemic U.S. banking firms—a package that is designed to materially reduce the probability of failure of these firms and to materially reduce the damage that would be done to our financial system if one of these firms were to fail,” Fed Chairwoman Janet Yellen said.

“The rule is largely in line with what regulators first floated in July but includes a proposed change that, if adopted, could force the banks to classify more of their holdings as potential exposures.”

“That, in turn, would require the banks to hold additional capital against their assets. The finalized leverage ratio will require the eight largest banks to add about $22 billion collectively, but they could also be on the hook for another $46 billion because of the new measurements of exposure to credit-default swaps, among other things.”

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Read full Wall Street Journal article here.

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