Fed directs 8 biggest banks to hold extra capital

Federal Reserve Chair Janet Yellen said that the decision is designed to implement accountability among the largest banks themselves – to “bear the costs that their failure would impose on others”, she said. “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”.

The government guaranteed up to $139 billion of GE Capital’s debt during the crisis. The new surcharge will begin being phased in at the beginning of 2016.

The Fed on Monday said it was aware of the GE Capital divestiture plan but that because the plan was not complete, the central bank needed to move ahead with its oversight.

JPMorgan Chase & Co faces the highest surcharge at 4.5 percent, followed by Citigroup at 3.5 percent.

Most US banks are already in compliance with the rules, but JPMorgan is facing a $12.5 billion shortfall for the compliance procedures.

Since the rule was first proposed previous year, all eight banks have taken action to meet the new standards, trimming in-house trading divisions, cutting exposure to certain high-risk financial markets, boosting long-term funding levels, and adding to their capital cushions.

The rule subjects USA firms to capital requirements stricter than those faced by their peers overseas – in some cases nearly twice the extra capital demand faced by foreign competitors. Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. are all at 3 percent.

The Fed also gave numerical estimates of what the rule would mean for each of the banks. The toughening of global standards, a practice known as gold-plating, reflects a view of USA regulators: Any bank big enough to potentially damage the financial system must maintain enough capital to ensure it doesn’t fail.

Comments from Fed governor Lael Brainard earlier this month raised anxiety among banks that the Fed is preparing to incorporate the new surcharge requirement into its annual “stress test” exam. While the rule itself is silent on whether that will happen, Fed governor Daniel Tarullo in prepared remarks said Fed officials are considering “whether and, if so, how to incorporate the surcharges” into the capital minimums banks must meet.

The Fed hasn’t decided whether to include the surcharges to the stress tests given to the largest US bank’s each year to determine how well the banks will fare in the event of another sharp economic downturn. By January 1, 2016, the finance unit must comply with risk-based and leverage capital, liquidity and reporting requirements.

The win came in the form of a change to the way the Fed will calculate a capital surcharge it applies to global systemically important banks.

GE said in April it plans to exit most of its lending operations. That could lead to the “systemically important” designation being removed as the financial company shrinks.