Updated, 9:08 p.m. | Federal regulators on Tuesday approved a simple rule that could do more to rein in Wall Street than most other parts of a sweeping overhaul that has descended on the biggest banks since the financial crisis.
The rule increases to 5 percent, from roughly 3 percent, a threshold called the leverage ratio, which measures the amount of capital that a bank holds against its assets. The requirement — more stringent than that for Wall Street’s rivals in Europe and Asia — could force the eight biggest banks in the United States to find as much as an additional $68 billion to put their operations on firmer financial footing, according to regulators’ estimates.
Faced with that potentially onerous bill, Wall Street titans are expected to pare back some of their riskiest activities, including trading in credit-default swaps, the financial instruments that destabilized the system during the financial crisis.
In that respect, some regulators and advocates for tougher financial regulation said, the new rule is a more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking. Capital is important to banks because it acts as a buffer for potential losses that might otherwise sink an institution.
“It’s real, it’s tangible, it makes a difference, and improves the banks’ loss absorbing capacity,” said Sheila C. Bair of the Pew Charitable Trusts and a former chairwoman of the Federal Deposit Insurance Corporation, a bank regulator. “Many of the other rules are about controlling behavior, but there is only so much behavior you can control.”
The banks and the shareholders have had time to brace for the rule, which was originally proposed in July. It is also scheduled to take effect at the start of 2018, giving the banks considerable time to adapt and raise capital.
The F.D.I.C., the Office of the Comptroller of the Currency and the Federal Reserve wrote the rule. But tensions among the agencies increased when William C. Dudley, the president of the Federal Reserve Bank of New York, raised the concern that the new rule could complicate the Fed’s efforts to conduct monetary policy. In the final rule, however, regulators said that they expected the impact on monetary policy to be limited.
“Banks with stronger capital positions are in a better position to lend, to compete favorably in any market and to achieve satisfactory results for investors,” Thomas M. Hoenig, vice chairman of the F.D.I.C., and a firm proponent of the rule, said in a statement. “Without sufficient capital, the opposite is true.”
As regulators approved the rule, they also proposed a crucial adjustment that would most likely make the rule tougher for firms with large Wall Street businesses. The regulators said that they expected that adjustment to be part of the rule by 2018, but banks are certain to lobby against it, as they did with the main rule. The financial industry contended that it was blunt and, in many ways, unnecessary.
“The benefit of the leverage ratio is that it’s a simple tool, but the problem with the leverage ratio is that it’s a simple tool,” said Oliver I. Ireland, a partner at the law firm Morrison & Foerster.
Under other regulatory calculations, banks get to set capital levels based on the perceived risk of their assets. The process of assessing risk, however, can be complex, subjective — and vulnerable to abuse by banks that want to try to increase profits by holding less capital.
In contrast, the new rule demands that the same amount of capital be held against all assets, regardless of their perceived risk. Still, opponents of the rule assert that holding large amounts of capital against safer assets, like United States Treasury securities, makes no sense.
“The wisdom of that is not completely clear,” Mr. Ireland said.
Under the rule, banks with over $700 billion in assets will have to raise their capital, measured by the leverage ratio, to 5 percent of their overall assets. The ratio will have to be 6 percent at the banks’ federally insured banking subsidiaries, where many of their riskiest activities are.
When the rule was proposed last year, many of the eight biggest banks appeared to already have sufficient capital to comply. But that may change if the proposed adjustment takes effect. The adjustment increases the assets that get counted in the leverage ratio calculation, most likely forcing banks to hold more capital than they expected. On Tuesday, the regulators estimated that the eight affected banks might have to find a combined $68 billion in capital to meet an adjusted rule.
The regulators did not identify which banks fall short. But, on paper, JPMorgan Chase appears to have a significant deficit at its large insured bank subsidiary. Calculations by The New York Times put the shortfall at around $30 billion.
In a conference call with investors this year, Marianne Lake, JPMorgan’s chief financial officer, said the bank could take financial actions to meet the new leverage ratio that would not significantly crimp its earnings
The regulators appear to have built the adjustment to the rule to reduce the risk of credit-default swaps, which played a central role in the so-called London whale trading scandal at JPMorgan. Under the adjustment, banks would have to hold extra capital against such swaps, unless their risk is properly offset with other trades.
The adjustment could also reduce the use of short-term borrowing called “repo” that Wall Street makes great use of. Repo loans came apart quickly in the crisis and contributed to the instability. Daniel Tarullo, the Fed governor who oversees regulation, has said that he wants extra regulations to deal with short-term funding.
In the adjustment, the regulators are also proposing a change that might have been motivated by a desire to stop another close-to-the-edge practice that has occurred at large banks. Certain firms have increased their assets to increase trading profits but then reduced them at the end of the month or quarter to minimize capital requirements. The adjustment could make that much harder by taking a daily average for assets for the entire quarter or month.
Some supporters of a tougher overhaul applauded the new rule, but they also questioned whether it was enough to do away with what they call the too-big-to-fail problem. They said that despite the overhaul, they believed that some banks were still so large that if they failed, taxpayers would still have to bail them out to prevent their collapse from weighing on the overall economy.
Senator Sherrod Brown, Democrat of Ohio, who has introduced a bill with Senator David Vitter, Republican of Louisiana, that envisions higher leverage ratios than those approved on Tuesday, said, “Today’s rule is a major step forward, but we can and must do more.”