BlackRock Inc. Chief Executive Officer Laurence D. Fink said rules requiring financial companies to have higher capital ratios may result in an increase in interest rates as banks shrink their balance sheets.
Banks reducing assets could limit reinvesting in government securities, which might lead to higher rates if the Federal Reserve starts to taper its bond purchases at the same time, Fink, 60, said today in an interview with Erik Schatzker and Sara Eisen on Bloomberg Television’s “Market Makers.”
“If they shrink their balance sheet, we’re going to have a more aggravated problem in the future because banks are the largest owner of U.S. Treasurys,” Fink said. “This could be another reason for a faster rise in interest rates.”
Under a proposal by U.S. regulators, the nation’s biggest lenders would need to retain capital equal to at least 5 percent of assets, and their banking units would have to hold a minimum of 6 percent, according to a statement yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent.
The plan affects the eight largest banks pegged as globally important, or too big to fail: JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp. The companies have until 2018 to fully comply if the proposal is finalized.
BlackRock, the world’s biggest money manager with $3.94 trillion in assets, is the largest shareholder of JPMorgan, Bank of America and Citigroup and the second largest of Wells Fargo, according to data compiled by Bloomberg. If the plan is approved, banks will have to either raise more equity or trim their balance sheet, Fink said.
The Basel Committee on Banking Supervision’s capital rules, which set requirements based on the perceived risk of a lender’s assets, don’t go far enough because assets like U.S. government debt require no offsetting capital, Fink said. For that reason, yesterday’s proposal from U.S. regulators, which sets a minimum ratio of capital to total assets, is an important step in helping prevent bailouts, he said.
“If you really want to tackle too big to fail, you’re going to have to do it through leverage ratios,” he said. Because government securities have risk-weightings of zero, Basel capital rules don’t affect them, “so institutions can have very leveraged balance sheets and still conform to the capital rules,” Fink said.
Fed Chairman Ben S. Bernanke has signaled that he is prepared to start phasing out the central bank’s $85 billion in monthly bond purchases later this year and halt buying around mid-2014, as long as the U.S. economy’s performance meets the Fed’s projections.
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