Fed directs 8 biggest United States banks to hold extra capital

The surcharges, outlined in a proposed rule in December, will be phased in starting January 1, 2016 and become fully effective three years later.

The Federal Reserve chairman Janet Yellen said: “A key objective of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others”.

The nation’s top eight banks will be held to minimum capital holdings or face stiff surcharges, according to a decision made by the Federal Reserve on Monday.

Also unlike the Basel agreement, USA firms will be evaluated on how much they rely on short-term funding – even as the agency gave them a break on how it calculates that dependence in this final rule. No company has been able to lose the label of “systemically important” and the Fed didn’t promise GE would be able to, either. The US central bank is allowing GE capital to meet the standards in two phases. Among the bank’s impacted by the surcharge are J.P. Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC). Lew that can designate non-bank financial companies for Fed oversight. It had struggled during the crisis due to mounting defaults and losses on loans in areas like credit cards, commercial real estate and heavy equipment.

Separately, the Fed was expected to approve tougher rules for General Electric Capital Corp., the company’s lending and leading unit, that would regulate it as a bank. That could lead to the “systemically important” designation being removed as the financial company shrinks.

The rule is designed “to reduce the risks posed by a GSIB to U.S. financial stability”, the Fed said.

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. If that happens, the Fed’s action will be cancelled.

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”. In December, Fed governor Stanley Fischer, in an apparent slip, disclosed that J.P. Morgan was about $21 billion short. The extra capital requirements, or surcharges, range from 1 per cent to 4.5 per cent of the banks’ risk-weighted assets, leaving the firms to choose between expensive capital demands or getting smaller.

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

The eight firms now subject to the surcharge are Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo. Essentially, the new rule requires banks to increase their levels of equity to account for higher-risk activities, or to cut back those activities.

Stricter capital requirements for banks were mandated by Congress after the financial crisis, which struck in the fall of 2008 and ignited the worst economic downturn since the Great Depression.