International regulators order mega-banks to boost capital to 9.5 percent

Introduction

Mega-banks’ capital – The very largest, “too-big-to-fail” banks will have to hold capital equal to about 9.5 percent of their risk-weighted assets, compared with about 7 percent for other big banks, international banking regulators in Basel said over the weekend. And if any of those mega-banks get even larger, they could face an additional 1 percent requirement, bringing their capital up to 10.5 percent.

That means Bank of America, Citigroup, and JPMorgan Chase & Co. will need a combined $150 billion of extra capital, reports the Wall Street Journal’s Heard on the Street column. Basel regulators give them until 2019 to fully meet the tougher standards, enough time to build capital through profits while also reducing risk-weighted assets.

U.S. banks have objected to higher capital standards being considered by American regulators, saying such a move could cause them to lose business to overseas banks. But Sheila Bair, head of the Federal Deposit Insurance Corp., and Federal Reserve Gov. Daniel Tarullo have said requiring banks to hold more capital is a sensible way of increasing their ability to absorb potential losses.

Derivatives control seen as crucial – Wall Street lobbyists are working overtime to undermine planned derivatives regulation and if successful, “we can expect more derivatives-trading crises in the future,” law professor Lynn Stout tells Barrons.

Stout, who teaches at the University of California in Los Angeles, believes that the Dodd-Frank law will reinstate common-law checks that had once discouraged speculative excess. Those checks disappeared with a 2000 commodities law that let banks make bets whose value were greater than the markets they were made in, she said, likening it to placing “a $1 million bet on a horse race with only a $100,000 purse.”

Q&A with Gensler – The existing derivatives market is concentrated among large financial institutions, but the Dodd-Frank reform law will democratize the system by improving transparency, reducing risk, and allowing smaller banks to compete for business, Gary Gensler told the Wall Street Journal.

As chairman of the Commodity Futures Trading Commission, Gensler oversees writing new rules to regulate derivatives. While the CFTC has nearly finished the proposal stage of rule-writing, it will need much of the rest of the year to finalize regulations.

Morgan Stanley’s Mack to retire –Morgan Stanley chairman John Mack, 65, has told friends that he plans leaving the firm by the end of the year, Fox Business reports.

Mack joined Morgan in 1972 as a muni bond salesman, rose to became president in 1993, and later was CEO for five years until he relinquished the position to James Gorman on Jan 1, 2010. Mack’s exit comes as Gorman tries to shift Morgan Stanley’s focus to brokerage accounts of small investors amid profits lagging behind competitors like Goldman Sachs.