Fed directs 8 biggest banks: Hold more

On July 20, the Federal Reserve announced it will require eight banks to keep $200 billion on hand as part of a plan to keep a global financial collapse at bay in the event of a capital emergency.

GE Capital is subject to Fed oversight because it’s been designated a systemically important non-bank by the Financial Stability Oversight Council, a group of United States regulators, so the governors needed to act on the plan, even as they acknowledged the company is slashing the size and scope of the finance unit’s activities.

“They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink”, Fed Chair Janet Yellen said in a statement.

The Fed unveiled the details of the final rule, first introduced last December, almost five years to the day since President Barack Obama signed the Dodd-Frank financial overhaul into law.

The ensuing expectation of government rescue allows those banks to borrow more cheaply in private markets, giving them an advantage over smaller competitors and actually fueling the growth and systemic importance of the largest firms, the critics say. JPMorgan, the largest USA bank by assets, has the stiffest capital surcharge at 4.5 percent of its assets.

But of the eight, only one is now below the new capital threshold: JPMorgan Chase, which needs to come up with an additional US$12.5 billion in capital by January 2019, when the new rules will be fully phased in. Consequently, the larger the surcharge that bank will be required to pay. The numbers were in line with an estimate by Goldman Sachs analysts in December.

The Wall Street Journal reported in late February that J.P. Morgan would begin charging large institutional customers fees for certain deposits, known as nonoperational, citing new rules that make holding money for clients too costly, including the pending capital surcharge.

The biggest USA banks have been told to set aside an extra $200bn in capital buffers to protect themselves and the wider economy against a future crash.

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

“We’re not capital short”, James Gorman, Morgan Stanley’s chief executive, said during a conference call on Monday before the Fed’s final rule was released. A key risk factor will be how much a bank relies on short-term funding markets to borrow from other banks.

Already, firms have taken steps ahead of the Fed’s move, issuing billions of dollars in preferred shares and long-term debt, beefing up capital by retaining earnings and bolstering profits from businesses considered safer, such as wealth- and asset-management.

The Clearing House Association, which represents Wall Street banks, said that while the final rule includes “some improvements” from the December proposal, it doesn’t “take into account the dramatic reduction in systemic risk” stemming from lenders’ efforts to reduce risks since the 2008 financial crisis. Among the bank’s impacted by the surcharge are J.P. Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC).