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How a Cap on Big-Bank Leverage Was Watered Down


Regulators can cap leverage if bank poses 'grave threat' to system

Speier, who allowed that the overall bill is good, added that the rationale behind a detailed leverage cap is to keep big banks from growing so dangerously large that, if they were to fail, they'd cause collateral damage to the markets. During the height of the boom leading up to the financial crisis, many investment banks hiked their leverage to as high as 50-to-1.

"High leverage has been shown to have been one of the best predictors of major financial firms' falling into distress or needing government support during the current crisis," she said. "I believe that it is a mistake to leave all discretion in how to accomplish that task to the primary regulators."

Davis Polk & Wardwell LLP, in a recent report on the bill, said it expects that the "grave threat" authority will rarely be used, and only as a last resort.

However, Heather McGhee, director of the Washington Office of Demos, expressed cautious optimism that some U.S. bank regulators could do a good job setting specific limits. "We can be confident that there are reform-minded regulators who want substantively higher capital requirements," McGhee said.