Fed to Apply New Rules to Slimmer GE Capital

The Federal Reserve told China Construction Bank Corp to do more to fight money laundering on Tuesday, in the first ever enforcement action by the US central bank against one of China’s four largest state-owned banks.

Seven of the eight lenders are already on track to meet the tougher new target, which is being imposed by the Federal Reserve because the banks are deemed to be globally systemically important financial institutions, whose collapse could cause shockwaves across the world.

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.

The surcharges have been controversial because USA banks are being held to higher standards than their global competitors. The toughening of global standards, a practice known as gold-plating, reflects a view of United States regulators: Any bank big enough to potentially damage the financial system must maintain enough capital to ensure it doesn’t fail.

In July, 2014, BNP Paribas pleaded guilty to two criminal charges and agreed to pay nearly $9 billion to resolve accusations it violated USA sanctions against countries such as Sudan, Cuba and Iran. The Fairfield, Connecticut-based company reached deals in June to unload its vehicle fleet- management and European buyout-lending divisions.

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. In recognition of GE Capital’s efforts to shrink, the Fed said it would roll out its set of standards in two phases. Lew that can designate non-bank financial companies for Fed oversight. 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.

“We think it’s important and are grateful 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.

JPMorgan, for instance, the nation’s biggest bank, faces the biggest surcharge requirement – 4.5% – and will need to raise an additional $12.5 billion in capital or reduce its balance sheet as the rule is phased in over the next three years.

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.