By Ryan Tracy
WASHINGTON--U.S. regulators on Friday gave eight of the largest
U.S. banks permission to use an alternative method to calculate
their capital levels, giving them more flexibility in weighing the
riskiness of their balance sheets but also subjecting them to
additional requirements for measuring such risk.
The regulators' approval marks a milestone for the banks, which
in some cases have been working toward receiving it for years. But
none of the banks are likely to see eased capital requirements as a
result of the change because the 2010 Dodd-Frank law set a minimum
for bank capital levels. Capital levels are likely to only increase
as a result of Dodd-Frank, which sought to boost the amount of
financing at banks so they could weather severe economic times.
The banks receiving the approval are The Bank of New York Mellon
Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase
& Co., Morgan Stanley, Northern Trust Corp., State Street
Corp., and U.S. Bancorp.
The Federal Reserve and the Office of the Comptroller of the
Currency said the banks had completed a minimum 12-month test run
to show they could accurately gather data on their assets and meet
heightened standards for measuring the risks associated with them.
The banks will begin using the new calculation method starting in
the second quarter of 2014 and incorporate it into stress tests
beginning Oct. 1, 2015, the agencies said in a press release.
The Fed in 2007 required internationally active big banks--those
with more than $250 billion in total assets or at least $10 billion
in on-balance sheet foreign exposure--to adopt a second approach
for calculating their capital levels. Some other banks that appear
to meet that threshold, including Bank of America Corp. and Wells
Fargo & Co., didn't receive approval Friday.
Bank regulators generally require banks to maintain minimum
capital levels, often in the form of common equity, to absorb
losses in a downturn. Banks that hold more risky assets generally
have to raise more capital, which can increase their costs of doing
business.
The alternative capital approach, agreed to by international
regulators on the Basel Committee on Banking Supervision, gives
banks the ability to use internal data to judge the riskiness of
various loans, such as mortgages. Traditional methods of
calculating capital are less flexible and generally treat
categories of assets the same way, regardless of the condition of a
particular bank's portfolio.
Write to Ryan Tracy at ryan.tracy@wsj.com