I endorse any effort to strengthen the capital positions of the largest US banks and, therefore, the banking industry as part of legislation the Senate Banking Committee will consider on Thursday.
With every dollar of assets funded with only 5 cents of tangible capital, the biggest firms operate with the most amount of borrowed money of any group of banks, giving them an enormous competitive advantage while making them most susceptible to shock.
By applying the tangible leverage ratio to the largest firms, an amendment by Senator David Vitter would help to level the competitive playing field by bringing the biggest banks closer to the capital positions of the rest of the industry. The tangible leverage ratio, the most reliable measure of capital, calculates funds available to absorb loss against total balance sheet and some off-balance sheet assets. It does not presume to predict or assign relative risk weights among asset classes, making it more difficult to game and providing the most clear and complete picture of a banking firm’s ability to absorb loss regardless of source. During the crisis, it is also the measure that investors followed most closely to judge the viability of firms under financial stress.
Banks with stronger capital positions maintain higher levels of lending over the course of economic cycles, compete favorably in the market, and survive economic shocks without failing or requiring bailout.