US May Double Bank Capital Requirements

From Bloomberg:

U.S. regulators are considering doubling a minimum capital requirement for the largest banks, which could force some of them to halt dividend payments.

The standard would increase the amount of capital the lenders must hold to 6 percent of total assets, regardless of their risk, according to four people with knowledge of the talks. That’s twice the level set by global banking supervisors.

U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private.

“The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.” 

FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules entirely in favor of a 10 percent leverage ratio, calculated to include even more off-balance-sheet assets than allowed under Basel and define capital more narrowly. To reach Hoenig’s requirements, the three largest U.S. banks -- JPMorgan, Bank of America and Citigroup (C) -- would have to stop distributing dividends for about five years, according to FDIC data and analysts’ earnings expectations compiled by Bloomberg. 

My view:

Banks are grossly over leveraged.

Even a 10 percent ratio is probably too low.

As stated previously on this blog, 15 percent is the minimum to give at least some robustness to our present system.

Alas, with all the hidden off balance sheet items, the massive notional value of derivatives, combined with accounting fraud, my concern is the entire system could collapse in a heap within 12 to 24 months unless truth, trust and accountability are restored quickly.

The continuing interconnectedness of all banks, bail-in protocols for struggling banks, and recent developments with SHIBOR in China are setting us up for something reminiscent of early 2008 just before the financial crisis.

Now is the time to have access both to cash and physical precious metals.

Let's hope for the best and prepare for tougher times ahead.