Capital Plan May Force Hard Choice at Big Banks

By Steven Sloan

 

 

A Treasury Department proposal to raise capital requirements for all banks could give some large institutions an incentive to walk away from their investment banking units. Ahead of a weekend meeting with the Group of 20 finance ministers, the Treasury released a framework for reforming domestic and international capital rules that would require set-asides for, among other activities, proprietary trading and other securities lending and borrowing that are staples of investment banking. The plan could force large banking companies, such as Bank of America Corp., which bought Merrill Lynch & Co. on Jan. 1, to rethink keeping their investment banking units, observers said. “That’s exactly the strategic decision that would have to be made,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. “Is the low-cost core funding provided through a banking charter worth the far higher prudential and regulatory requirements?” “The administration posits the capital framework in part on the grounds that systemic risk regulation would catch any nonbank,” Petrou said. “But what would that mean? What would its capital requirement be? It would just be ‘tough’?”

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