Fed directs 8 biggest U.S. banks to hold capital

The Fed said in December it was looking into factoring surcharges into the tests, though that would require a separate rule. “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 moves reinforce the central mandate of the Dodd-Frank financial overhaul law signed by President Barack Obama five years ago.

The Federal Reserve finalized rules Monday that requires the nation’s biggest banks to hold much more capital to guard against collapse. So-called stress tests measure banks’ resilience each year and can restrict shareholder payouts at firms that don’t pass.

Fed Chairwoman Janet Yellen, before voting to approve the new measure, said financial firms must “bear the costs that their failure would impose on others”.

The surcharge gives big banks a choice.

These kinds of restrictions on banks have prompted worries about unintended consequences, such as volatility in financial markets that a few ascribe to banks being less willing to take on risk.

Unclear is how far regulators intend to push the biggest banks.

Officials of New York-based JPMorgan have said the bank will do whatever is needed to meet the capital requirements. “That is what we’re going to continue to do”. A J.P. Morgan spokesman on Monday said the bank is analyzing the rule.

The agency made a few changes the lenders had asked for. Retail deposits weren’t affected.

Among the other banks, Citigroup Inc. faces a 3.5% surcharge; Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley face 3%; Wells Fargo & Co.

GE is selling about $200 billion of assets as it reduces the size of the finance business and refocuses on manufacturing units making heavy-duty products such as gas turbines, jet engines and medical scanners.

The Fed rules for GE Capital would be phased in over more than two years. “If anything, we’re capital heavy”.

“We think it’s important and are grateful that the Federal Reserve has taken GE Capital’s submissions, circumstances and exit plan into account”, GE Capital said in a statement following the Fed meeting.

All eight banks are on track to meet the new requirements, although JPMorgan is currently $12.5 billion short. As those factors shrink or grow, so will a bank’s surcharge.

The Federal Reserve, which regulates banks in addition to its high-profile role in monetary policy and setting benchmark interest rates, suggested that the rules could create an incentive for banks to remain smaller, presenting less systemic risk in the event of a failure. The company came under the Fed’s supervision.

“It would not be sensible for us to disregard GE’s announced plan to reduce GECC’s size by about 70 percent, particularly in light of the fact that it is demonstrably executing that plan”, said Fed Governor Daniel Tarullo.

Emily Glazer and Ted Mann contributed to this article.

Access Investor Kit for JPMorgan Chase & Co. Seven already meet it now.