Fed Finalizes Higher Capital Surcharge Rule for Largest Banks

Federal regulators on Monday, July 20, 2015 are directing the eight biggest US banks to hold capital at levels above industry requirements, to cushion against unexpected losses and reduce the chances of future taxpayer bailouts.

“A key objective of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others”, Fed Chairwoman Janet Yellen said in a written statement released Monday.

The Fed also gave numerical estimates of what the rule would mean for each of the banks.

“While incorporation of some or all of the capital surcharges would be one way to account for those risks, it is only one among a number of possibilities, all of which we will want to evaluate”, Tarullo said.

“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”.

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.

The ensuing expectation of government rescue allows those banks to borrow more cheaply in private markets, giving them an advantage over smaller competitors and actually fueling the growth and systemic importance of the largest firms, the critics say.

The new requirements for the eight firms will be phased in from 2016 to 2019, according to the Fed. So-called stress tests measure banks’ resilience each year and can restrict shareholder payouts at firms that don’t pass. In recognition of GE Capital’s efforts to shrink, the Fed said it would roll out its set of standards in two phases. The numbers were in line with an estimate by Goldman Sachs (GS.N) analysts in December.

The company said in February that it would do “whatever it takes” to keep the surcharge below 4.5 percent. “Today our capital and liquidity levels are above the regulatory minimums and we are fully prepared to meet the applicable standards as we execute the exit plan”.

As with its other major rules, the Fed capital measure goes beyond what global regulators in Basel, Switzerland, negotiated for “systemically important” banks.

The Fed’s final rule also reduced how heavily banks would be penalized for relying on certain of types of short-term funding, including wholesale deposits. Alone in falling short, JPMorgan was said at the time to need around US$22 billion in new capital. GE has announced a plan to divest about $200 billion in GE Capital assets by 2018, pulling the parent company closer to its industrial roots and away from finance.

The central bank on Monday also decided against incorporating the extra capital requirements in its annual “stress tests” of the banks’ health, which, The New York Times reported, could have forced many of them to raise even more capital. Among the bank’s impacted by the surcharge are J.P. Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC).