July 17, 2013 5:52 pm

BNY Mellon urges change to borrowing rule

Bank of New York Mellon said it would urge US regulators to exclude a “perverse” aspect of a new rule aimed at capping banks’ borrowing, in one of the first signs that the financial industry intends to lobby against parts of the proposal.

The biggest banks would have to hold extra capital against all of their assets under a new US “leverage ratio” rule outlined by regulators including the Federal Reserve and the Federal Deposit Insurance Corporation earlier this month. Total assets would include cash held on deposit at central banks, as well as government bonds.

“The main point that we are going to talk to the supervisors [about] through the comment period is the treatment of cash at central banks,” said Gerald Hassell, BNY Mellon’s chairman and chief executive. “It’s kind of perverse to think that we have to hold capital against cash that we hold at central banks.”

As a custody bank, BNY Mellon is responsible for tracking and safeguarding billions of dollars of its customers’ assets, making it particularly vulnerable to the new rule.

The leverage ratio is valued by US regulators as a simpler and blunter tool to gauge the strength of banks since it ignores the perceived riskiness of assets, and instead measures capital against total securities and loans on balance sheets.

BNY Mellon said that its leverage ratio would currently be “in the low fours” – less than the 5 to 6 per cent required under the regulators’ leverage proposal.

Mr Hassell stressed that the bank had “a lot of levers that we can pull if necessary” to meet the proposed borrowing requirement, which comes into effect in 2018.

BNY Mellon, the world’s biggest custodian bank by market value, on Wednesday reported second-quarter net income of $833m, up 79 per cent year on year, thanks to rising stock and bond prices. Northern Trust, a smaller custody bank, said its profit for the three months to July rose 6.2 per cent to $187.9m.

The leverage ratio has become a theme in the second-quarter bank earnings season, with analysts and investors pressing financial companies for their early estimates of the figure. On Tuesday, Harvey Schwartz, chief financial officer of Goldman Sachs, repeatedly declined to give a leverage ratio estimate.

The bank is waiting to see what the final rule looks like, he said.

Executives at JPMorgan Chase and Citigroup have said they believe regulators may alter some of the most drastic parts of the proposal.

Under international Basel III banking rules, “safer” securities such as government bonds and cash are given a zero per cent risk-weighting, meaning banks are not required to hold capital against them. Larry Fink, chief executive of BlackRock, has said the new rule could make it more expensive for banks to hold US government bonds.

The leverage ratio’s treatment of government bonds “is an area that could possibly see some softening in the final rules”, said Howard Chen, analyst at Credit Suisse.

With additional reporting by Tom Braithwaite in New York.

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