Fed directs 8 biggest US banks to hold extra capital Republican American

WASHINGTON (AP) – Federal regulators are directing the eight biggest USA banks to hold capital at levels above industry requirements to cushion against unexpected losses and reduce the chances of future taxpayer bailouts.

This could be due to the fact that JPMorgan faces the largest risk-based capital surcharge.

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.

They also want to discourage banks from relying on unstable short-term borrowing, a key contributing factor to the demise of Lehman Brothers at the height of the financial crisis in 2008. Alone in falling short, JPMorgan was said at the time to need around US$22 billion in new capital.

“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.

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.

“In practice, this final rule will confront these firms with a choice: 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”. But banks continued to grumble that the surcharge was an unfair burden on their business.

The Fed “clearly intends the very largest US banks to buckle under this new capital regime, restructuring quickly and dramatically”, Karen Petrou, a managing partner at Federal Financial Analytics, a policy-analysis firm, told The Wall Street Journal.

Fed critics, though, argue that intervening in the market to identify the most important financial insitutions signals investors that the same banks would be so-called too-big-to-fail in a crisis. Wells Fargo & Co.is at 2 percent, while State Street Corp. and Bank of New York Mellon Corp. are at the low end – 1.5 percent and 1 percent.

The new requirements for the eight firms will be phased in from 2016 to 2019, according to the Fed. The Fed’s formula roughly doubles The surcharge amount for each US bank compared with The global version of The rule, Fed officials said.

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.

However, GE has announced plans to reduce the size of its capital unit by 70%. Its general counsel, Brackett Denniston, said the finance unit will apply to lose its systemically important label sometime next year.