On Tuesday evening, a group of U.S. Bank Regulators approved the so-called Leveraged Capital Rule, which would require a greater equity capital requirement for the eight Largest Banks. The NY Times article is linked, as follows: http://dealbook.nytimes.com/2014/04/08/regulators-set-to-approve-new-capital-rule/?ref=financialregulatoryreform.
Before this Rule, the requirement would have been significantly lower for the Largest Banks, which hold somewhere around 68% of all FDIC-Insured Deposits in America. The on-going problem is that, because the government bailed these banks out in 2008, many people believe that they exist with a tacit guarantee by the U.S. Treasury. That’s why they grew so large, as compared to the overall Banking Industry.
The topics discussed in the article are somewhat difficult to understand. Suffice it to say that more bank capital is always safer. Capital, in this instance, is like homeowners’ equity: it safeguards the Institution’s assets in case of a market decline. The problem; however, is that this great Rule will not go into effect until 2018. Hence, that gives the Banking Industry five years to whittle away at the strength of the Rule.
And, the Banks definitely will fight the Rule tooth and nail. The Banks will now be forced to sell more stock, thus diluting stockholder equity, or sell some of the riskier assets, or both. Either way, more equity capital would reduce profits–and that’s what the Senior Executives Salary and Bonus are generally based on. Shouldn’t Safety of Capital also be included in that formula?