(Bloomberg) -- European Central Bank Vice President Vitor Constancio said he’s concerned that the U.S. could relax bank capital rules even further after the announcement of lower leverage limits for Wall Street banks this week.
The Federal Reserve said on Wednesday that it wants to scrap an existing method for measuring each bank’s borrowing limits and instead tailor restrictions to the risks posed by specific firms. The move could free up $121 billion in capital, according to regulators.
Constancio said he fears that on top of that, regulators could give in to the idea to introduce exemptions to this so called leverage ratio, which is a requirement that banks maintain a minimum level of capital against all their assets. That would undermine one of the key achievements to make banks safer after the financial crisis, he said at an event in Brussels on Thursday.
“The introduction of a leverage ratio as a backstop, as something that can be a brake is a very important thing and I see with concern that there are several movements and things going on that would undermine the role of the leverage ratio,” said Constancio, whose term ends on May 31.
Own Capital
Any exemptions to leverage limits could allow banks to engage in certain kinds of businesses, such as investing in government bonds, without having to fund them with own capital.
“One thing that I fear as regards the leverage ratio, for instance, is the proposal, or idea, that is also reflected in the U.S. Treasury report on financial reform, to start giving exemptions of things that would not count anymore for the calculation of the leverage ratio,” Constancio said. “I certainly hope not.”
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