New banking regulations looming

The finance world is buzzing with news of even more regulations for various parts of the markets.

The Wall Street Journal reported in a story by Ryan Tracy and Stephanie Armour that capital requirements for large banks are about to go up, potentially making it even harder to get a loan:

U.S. regulators are set to impose another curb on risk taking at the largest U.S. banks Tuesday as part of a continuing push to force big banks to gird themselves against periods of market stress.

Under the new “leverage ratio,” scheduled for a vote by the Federal Deposit Insurance Corp. and the Federal Reserve, the eight biggest U.S. firms would have to double the amount of capital they hold as protection against every loan, investment, building, security and other asset on their books—not just the risky ones.

The rule could force big banks to add tens of billions of dollars in new capital, though many have been bulking up since regulators first floated a leverage ratio in July

The biggest companies would be required to maintain loss-absorbing capital worth at least 5% of their assets, and their FDIC-insured bank subsidiaries would have to keep a minimum leverage ratio of 6%. The amounts, which are line with what banks expected from regulators, compare with the 3% set out by international accord.

For the largest banks, satisfying the new requirement will likely be manageable in the near term, but analysts warned it could constrain future growth since it would limit each bank’s ability to increase its asset base, forcing it to either raise more cash from investors or shed assets elsewhere if it begins to bump up against the ratio’s limits.

“In an environment where you are getting strong economic growth, it could be a limiting factor with how much you can grow,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette, & Woods.

And that’s not all for the conglomerate banks. They may also have to worry about their trading businesses as well. Nelson D. Schwartz wrote in a New York Times story that many are calling for trading surcharges:

But a burst of outrage in recent days generated by Michael Lewis’s new book about the adverse consequences of high-frequency trading on Wall Street has revived support in some quarters for a tax on financial transactions, with backers arguing that a tiny surcharge on trades would have many benefits.

“It kills three birds with one stone,” said Lynn A. Stout, a professor at Cornell Law School, who has long followed issues of corporate governance and securities regulation. “From a public policy perspective, it’s a no-brainer.”

Not only would the tax reduce risk and volatility in the market, Professor Stout said, but it would also raise much-needed revenue for public coffers while making it modestly more expensive to engage in a practice that brings little overall economic benefit.

Despite these arguments, and support from many economists on the left for what European advocates have called a “Robin Hood tax,” even backers acknowledge the idea faces a struggle to become law, especially in the United States but also more broadly in Europe.

Not only are Republicans in Congress against new taxes in general, as are many Democrats, but opposition from deep-pocketed campaign donors on Wall Street is enough to persuade even politicians who might favor the idea to back off. Last Wednesday’s Supreme Court ruling allowing individuals to make much larger campaign donations to candidates and political parties strengthens the hand of donors.

But it’s not all rosy on the other side of the pond either. Mark Cobley reported for Financial News that banks could also have to set aside more to cover their pensions:

The UK’s five largest banks may have to find billions of pounds of extra high-quality capital to back their pension schemes under regulations coming in next year.

Pensions consultancy Redington has calculated the requirement as £12 billion. It cautions that it has used figures from the banks’ 2012 accounts. Banks could have reduced their liability by reducing equity exposure since then.

Redington based its analysis on an announcement in December by the Prudential Regulation Authority, the Bank of England’s risk watchdog, on how it would apply new EU capital requirements to banks’ pension finances.

The PRA said that under part of the EU Capital Requirements Directive IV, which comes into force on January 1 next year, the quality of capital banks hold against their pension schemes would have to be higher. Around half of their pension risk will have to be backed by core Tier 1 capital, the highest quality, consisting of shareholders’ equity and retained earnings.

The provisions are “far more punitive than the pension trustees’ usual deficit measures”, according to Antony Barker, director of pensions at Santander, one of the banks analysed by Redington.

All these new rules on various parts of the business don’t bode well for banks, particularly those with lending and trading in multiple countries. While it has always been complicated to be a multinational bank, regulators around the world are asking them to hold more money, which only means there’s less for the rest of us to borrow.