Banking on Leverage

A proposal to increase capital ratios for the biggest financial firms to 6% for bank subsidiaries and 5% for bank holding companies while good, presents a huge loophole. A $150 billion bank would need $7.5 billion in capital. But if it puts $50 billion in a BHC, the subsidiary would have to hold $6 billion in capital, the BHC just $1.5 billion. That’s a leverage ratio of 33 (50/1.5), whoa!