Regulators Set to Approve New Capital Rule

A campaign to make the financial system safer advanced on Tuesday, as federal regulators were expected to approve a rule that could put large banks on a firmer footing and persuade them to pare back potentially risky Wall Street activities.

And in a move that could further unsettle the financial industry, the authorities proposed a change to the new rule that could make it even tougher. The regulators estimated that the nation’s eight largest banks would need to raise as much as $68 billion to $95 billion to meet the requirements of the new rule.

The rule, known as the supplementary leverage ratio, puts a stricter cap on the amount of borrowing that banks do to raise money to make loans and buy securities. The new rule effectively requires big banks to raise more money from their shareholders and borrow less from depositors and creditors. When banks become overreliant on borrowing, known as leverage in the industry, they are more vulnerable to losses and market instability. This occurred in the run-up to the financial crisis of 2008, and was one of the main reasons that banks needed taxpayer bailouts.

“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 Federal Deposit Insurance Corporation, and a firm proponent of the rule, said in a statement. “Without sufficient capital, the opposite is true.”

The Fed, along the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, were all scheduled to meet on Tuesday to approve the rule.

The banks fought the rule because they felt it was too blunt and in some ways unnecessary.

One regulator, William C. Dudley of the Federal Reserve Bank of New York, had raised concerns about the rule, and suggested that the rule writers consider whether it could work against monetary policy.

The new rule requires banks to increase their leverage ratio, which measures their capital as a percentage of their assets. Capital mostly represents funds raised from shareholders, so as capital goes up, banks in theory borrow less.

Under the new rule, the country’s largest banks would effectively be required to have a leverage ratio of 5 percent at their holding companies, and 6 percent at the subsidiary banks insured by the F.D.I.C.  They have until the start of 2018 to reach those levels, and beginning next year they have to start disclosing their calculations of their leverage ratios.

The change to the new rule proposed on Tuesday would most likely make it more onerous for banks that do a lot of Wall Street trading. The tweak requires banks to count a wider array of assets when calculating the ratio, even assets that might not be fully reflected on their balance sheets. As the asset total rises, the bank would have to hold more capital. A Wall Street product that will have more weight in the asset calculation is credit derivatives, the financial instruments that allow banks and investors to bet on the perceived creditworthiness of corporations.

The regulators did not disclose which banks fall short of the ratio today. But, with the proposed change, the holding companies of eight big banks would need to raise $68 billion in capital to meet the higher leverage ratio.

At the insured bank subsidiaries, the theoretical shortfall is even higher at $95 billion, according to a regulatory official on a press call on Tuesday. Regulators, however, said that banks could take steps to reduce the capital deficit by reducing their exposure to the risks of certain assets.

“The financial crisis showed that some financial companies had grown so large, leveraged, and interconnected that their failure could pose a threat to overall financial stability,” Janet L. Yellen, chairwoman of the Federal Reserve, said in a statement. “Today’s action is another step in the Federal Reserve’s efforts to address those risks.”