WASHINGTON -- The nation's eight largest banks would have to meet tougher leverage limits than required under international standards as part of new rules proposed Tuesday by federal regulators designed to protect taxpayers from another financial crisis.
Under the plan, Bank of America Corp., JP Morgan Chase & Co., Citigroup Inc. and the five other U.S. bank holding companies designated as "systemically important financial institutions" would have to hold capital equal to at least 5% of their total assets.
The federally insured banks owned by those companies, such as Citibank and Chase bank, would have to hold capital equal to at least 6% of their assets, according to the proposed rules.
Other U.S. banks and bank holding companies only have to meet a 3% leverage ratio under rules adopted by regulators as part of an international agreement known as Basel 3.
The extra capital for the largest banks is designed to protect the Federal Deposit Insurance Corp. fund that covers most deposits when an institution fails.
It also is designed to protect taxpayers who might be on the hook for losses if one of the largest banks has to be seized and dismantled by regulators to prevent damage to the financial system and broader economy.
As of the third quarter of 2012, the eight bank holding companies would need to increase their capital by a combined $63 billion to meet a 5% leverage ratio, regulators said. The banking units of those companies would have to raise a combined $89 billion in capital to meet their proposed 6% leverage ratio.
Banks that didn't meet the new ratios would face restrictions on dividend payments, stock buybacks and executive bonus payments, according to the rules proposed by the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency.
"Maintenance of a strong base of capital at the largest, most systemically important institutions is particularly important because capital shortfalls at these institutions can contribute to systemic distress and can have material adverse economic effects," said FDIC Chairman Martin J. Gruenberg.
The proposal came as the FDIC board and the Office of the Comptroller of the Currency also gave their approval to new rules on bank capital reserves adopted by the Fed last week.
Those rules, also part of the Basel 3 agreement, require all banks to hold more and higher quality capital to absorb potential losses.
But in adopting those rules, Fed and FDIC officials said the new 3% international leverage ratio was not high enough for the eight systemically important U.S. banks.
FDIC vice chairman Thomas Hoenig felt so strongly about the need to boost the leverage ratio for those institutions that he voted against approving the other rules on Tuesday because they did not include the proposed ratio increase.
He was the only member of the five-person FDIC board or the seven-member Fed Board of Governors to vote against the capital rules. The head of the OCC also approved the capital rules, which will be phased in by 2019.
The public has 60 days to comment on the proposed leverage ratio, which then would have to be approved by regulators. If approved, the new rules would take effect by Jan. 1, 2018.
"I support more and better capital," Hoenig said at Tuesday's FDIC board meeting. "However, the Basel 3 standard without a binding leverage constraint remains inadequate to the task of assuring the American public, who paid a high price for the financial crisis, that our capital standards are adequate to contribute to financial stability."
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