Fed directs 8 biggest US banks to hold

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 other banks now have enough capital to meet the requirement, the officials said.

In effect, the surcharge is an incentive for banks deemed “too big to fail” to avoid taking on too much risk.

The surcharges apparently will not be part of the next round of bank stress tests.

The Fed Board of Governors is slated to formally adopt the final rule at an open meeting this afternoon.

The council was created by the 2010 Dodd-Frank law to identify threats to the financial system originating outside banks. Consequently, the larger the surcharge that bank will be required to pay. JPM had the highest surcharge level at 4.5 percent followed by Citigroup with 3.5 percent. They can fund their operations with less borrowed money and hold more common equity, which can crimp returns. Goldman Sachs (GS), Wells Fargo (WFC) and Bank of New York Mellon (BNY) would also face surcharges. 2%; State Street Corp.

The Fed governors also unanimously adopted standards for new supervision by the Fed of General Electric Co.’s finance arm, which will be subject to rules similar to those governing big banks.

While the broad contours of the surcharge remained unchanged from the December draft, the Fed did adjust pieces of the rule in response to industry concerns.

The ruling establishes minimum holdings among what the Fed dubs “global systemically important banks”, or GSIBs, the firms with the most risk-based endeavors.

Under the final rule, the Fed will determine each bank’s riskiness by comparing it to a fixed baseline: Global statistics on the banking sector from 2012 and 2013. This, according to the Fed, is aimed at reducing the reliance on short-term wholesale funding, which “left firms vulnerable to runs and fire sales” during the crisis, the report states. It requires the firms to hold more capital than their smaller peers to better protect them-and the economy as a whole-against big losses. The Fed tweaked its formula to use an average euro-dollar exchange rate over a three-year period, as opposed to a spot rate. “If GECC is de-designated during the next two and a half years, the full set of enhanced prudential standards will never take effect”. It phases in from January 1, 2016 through the end of 2018.

“We think it’s important and are gratified that the Federal Reserve has taken GE Capital’s submissions, circumstances and exit plan into account in finalizing the order”, GE spokesman Seth Martin said in a statement. “That is what we’re going to continue to do”.