U.S. sets capital surcharges for largest 8 banks, Banking & Finance

The Federal Reserve Governor Daniel Tarullo said: “A set of graduated capital surcharges for the nation’s most systemically important financial institutions will be an especially important part of the strengthened regulatory framework we have constructed since the financial crisis”.

The final surcharge requirement, when it takes full effect, will result in the eight US banks maintaining an equity cushion against losses that is more than $200 billion larger than it would otherwise have been, Fed officials said.

Most USA banks are already in compliance with the rules, but JPMorgan is facing a $12.5 billion shortfall for the compliance procedures. JPMorgan, the largest US bank by assets, has the stiffest capital surcharge at 4.5 percent of its assets.

Members of the Federal Reserve on Monday approved a plan that would give General Electric’s finance arm a chance to shrink itself before it is regulated as if it were a big bank capable of bringing down the financial system in a failure.

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.

The Fed said in December it was looking into factoring surcharges into the tests, though that would require a separate rule.

The Fed completed one rule stating that the eight largest banks in the country should maintain an additional layer of capital to protect against losses, its plainest effort yet to encourage them to shrink.

For Wall Street banks and their investors, the emerging regime presents a series of choices: specifically whether to pay the cost of new regulation, which will fall to the bottom line, or change their business models by shedding businesses or withdrawing from certain markets, such as owning commodities. The banks include JPMorgan Chase, Citigroup and Bank of America.

The Federal Reserve announced rules Monday on banks deemed to be Global Systemically Important Financial Banks, or G-SIBs. Morgan Stanley and Goldman Sachs would need an estimated 3% in additional capital, while Wells Fargo, which has little presence on Wall Street, would face only a 2% requirement. He said he expects that Fed staff this year will develop recommendations including changes that would make the stress tests “better address systemic risks arising from correlations in the exposures and activities” of large banks. 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 new requirements for the eight firms will be phased in from 2016 to 2019, according to the Fed.

GSIBs have to calculate their surcharges under two methods as per the final rule and use the higher of the two surcharges.

The agency is also set to vote on new standards for their supervision of General Electric Co.’s finance unit.

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