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 They said bank regulators' release this week of tough new limits on
debt funding is just a preview of other rules that may have even
more bite.
The eight largest U.S. banks must boost their capital levels by an
estimated total of $68 billion to meet new limits on debt that
regulators approved on Tuesday, a move designed to reduce banks'
reliance on the type of risky financing that fueled the 2007-2009
financial crisis.
Goldman Sachs <GS.N> and Morgan Stanley <MS.N> could be most
affected since regulators proposed a framework that is tougher on
businesses like the selling of credit derivatives to protect against
corporate defaults, according to Steven Chubak, a banking analyst at
Nomura Securities.
Executives at some of the biggest Wall Street banks said in
interviews that they began planning for the rules when they were
proposed last year, and they expect to be in full compliance before
the regulations take effect in 2018.
But analysts paid special attention to comments from Federal Reserve
Governor Daniel Tarullo, who said on Tuesday the tough rules should
spur regulators to set more funding limits.
Those proposed reforms include a surcharge for the biggest global
banks and possibly additional capital rules for banks that rely on
risky, short-term funding.
Fed officials also want banks to hold much more long-term debt to
make it easier for regulators to unwind failing banks in a crisis.
"I call them the four horsemen of the apocalypse," said Greg Lyons,
who leads the financial institutions group at the law firm Debevoise
& Plimpton, in reference to the leverage rules and the three other
pending requirements.
Without insight into how tough these other rules will be, experts
said it's hard to put a number on how much more capital banks will
have to raise, or how banks may restructure their businesses to
soften the blow.
"We've got all of these pieces but ... it's not clear we know where
we're going overall, or what the world looks like when we get
there," said Oliver Ireland, a partner with Morrison & Foerster in
Washington.
UNCERTAIN FUTURE
The Fed and two other bank regulators on Tuesday set leverage
requirements for the biggest bank holding companies to maintain
top-tier capital, such as shareholder equity, equal to 5 percent of
total assets. Insured subsidiaries must meet a 6 percent ratio.
The rules, part of a global agreement to require more capital after
the 2007-2009 financial crisis, would apply to JPMorgan Chase & Co <JPM.N>,
Citigroup <C.N>, Bank of America <BAC.N>, Wells Fargo <WFC.N>,
Goldman Sachs, Morgan Stanley, Bank of New York Mellon <BK.N> and
State Street <STT.N>.
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But the three other rules often mentioned alongside the leverage
ratio are outstanding, and less is known about how they will turn
out.
The long-term debt requirement, which would convert to equity in a
crisis and serve as a capital buffer for a failed bank, and the
surcharge for global banks are both priorities for international
regulators as well as the Fed.
Tarullo has made cracking down on short-term funding a pet project,
mentioning it frequently.
On Tuesday, he said the finished leverage requirement "provides a
little bit of reinforcement to ... the possibility of an additional
capital charge addressed to the vulnerability of firms to runnable,
wholesale, short-term funding."
Extra pressure from lawmakers and outside groups continues to
encourage regulators to end the perception that the U.S. government
would bail out the biggest banks if they were to fail. That gives
regulators added incentive to clamp down further on funding.
The International Monetary Fund recently published a study that
found that assumption lets the biggest U.S. banks borrow more
cheaply than smaller banks, with the savings on funding costs
ranging from about $20 billion to $70 billion.
Ireland said funding rules for banks probably will only get tougher
in this environment.
"I think you have to look at this on the background of 'too big to
fail,'" Ireland said. "And there's still a lot of talk in Congress
about higher capital levels for too-big-to-fail (banks)."
(Reporting by Emily Stephenson and Lauren Tara LaCapra;
additional
reporting by Peter Rudegeair; editing by Karey Van Hall and Jan
Paschal)
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