Fed directs 8 biggest US banks to hold extra capital

The Fed governors voted 5-0 at a public meeting to impose the so-called “capital surcharges” on the eight banks.

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

The government stepped in during the crisis with hundreds of billions of dollars in bailouts of the big Wall Street banks as well as hundreds of smaller USA banks. In keeping with the spirit of that legislation, Fed officials say the capital requirement is designed to encourage the biggest banks to shrink and take other steps to reduce the threat their potential failure poses to the financial system.

The size of each bank’s additional capital requirement is tailored to the firm’s relative riskiness, as measured by a formula created by global regulators and the Fed. By January 1, 2018, it would be subject to most rules that apply to bank-holding companies, including corporate governance standards and stress tests.

GE Capital’s attempt to evade the label of “systemically important” is of significant interest to the financial industry and members of Congress who have anxious that the designation is a regulatory “Hotel California”, burdening companies with added regulations but providing them with no way out.

The government guaranteed up to $139 billion of GE Capital’s debt during the crisis.

As with its other major rules, the Fed capital measure goes beyond what worldwide regulators in Basel, Switzerland, negotiated for “systemically important” banks. GE Capital issued about $51 billion in long-term debt and $17 billion in short-term debt with government backing. The Fairfield, Connecticut-based company reached deals in June to unload its vehicle fleet-management and European buyout-lending divisions. It is being permitted to do so because its parent company, General Electric, is in the midst of shrinking its finance arm and is in the process of trying to get de-designated as a nonbank SIFI.

However, GE has announced plans to reduce the size of its capital unit by 70%.

Next (Other OTC: NXGPF – news) up is Citi, with a 3.5pc additional buffer, then Bank of America (Swiss: BAC.SW – news), Goldman Sachs and Morgan Stanley (Xetra: 885836 – news) – all on 3pc.

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.

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.