Fed finalizes rules requiring big bank capital buffers

GE Capital was under scrutiny because USA regulators in 2013 judged its failure could hurt the broader USA economy and designated it “systemically important”, a label created under Dodd-Frank that brings stricter oversight to such firms from the Fed.

The Fed “clearly intends the very largest US banks to buckle under this new capital regime, restructuring quickly and dramatically”, said Karen Petrou, a managing partner at Federal Financial Analytics, a policy-analysis firm.

Only JPMorgan faces a shortfall of $12.5 billion at the moment, Federal Reserve staff said on a conference call.

“This final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system”, said Fed Chairwoman Janet Yellen in a statement.

The so-called “risk-based capital surcharge” would apply to banks with at least $250 billion in total assets, or at least $10 billion in foreign exposure, that rely heavily on short-term wholesale funding, including overnight loans. Alone in falling short, JPMorgan was said at the time to need around US$22 billion in new capital.

Speaking at the Fed meeting, Governor Daniel Tarullo said that “it would not be sensible for us to disregard GE’s announced plan to reduce [General Electric Capital Corporation’s] size by 70 percent, particularly in light of the fact that it is demonstrably executing that plan”.

The Fed’s warning, articulated in a pair of rules it finalized Monday, is among the central bank’s starkest postcrisis regulatory moves pressing Wall Street banks to reconsider their size and appetite for risk. The larger the bank’s economic impact, the bigger threat it poses in the event of another crisis. The new surcharge requirement comes on top of a base 7% common-equity capital requirement that most banks face under global banking rules.

WASHINGTON-The Federal Reserve sent a message to the largest US financial firms: Staying big is going to cost you.

Besides JPMorgan, the institutions identified as global systemically important banks and subject to the new rule are Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, Citigroup and State Street.

The agency is also set to vote on new standards for their supervision of General Electric Co.’s finance unit. The Fed’s formula roughly doubles The surcharge amount for each USA bank compared with The worldwide version of The rule, Fed officials said. By January 1, 2016, the finance unit must comply with risk-based and leverage capital, liquidity and reporting requirements.

GSIBs have to calculate their surcharges under two methods as per the final rule and use the higher of the two surcharges.

GE said in April it plans to exit most of its lending operations.

As with its other major rules, the Fed capital measure goes beyond what worldwide regulators in Basel, Switzerland, negotiated for “systemically important” banks.