JPMorgan Chase is the only one that doesn’t already meet the requirements. The new additional layer of requirements for the biggest banks also exceeds the levels mandated by global regulators. 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. JPMorgan was previously identified as the only institution facing a shortfall, which was more than $20 billion when the rule was first proposed in December but has been narrowed as the company has cut more than $100 billion in non-operating deposits – extra cash held in client accounts – and billions in trading assets.
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The Federal Reserve’s Dan Tarullo could impose tougher requirements on Wall Street’s biggest banks.
Fed Chairwoman Janet Yellen, before voting to approve the new measure, said financial firms must “bear the costs that their failure would impose on others”. Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) are at 3%. She offered banks the choice of maintaining more capital to reduce the chance they would fail, or get smaller and reduce the harm their failure would have on the financial system. They can fund their operations with less borrowed money and hold more common equity, which can crimp returns. A key risk factor will be how much a bank relies on short-term funding markets to borrow from other banks.
Estimated surcharges for the eight GSIBs will range from 1.0 to 4.5% of each firm’s total risk-weighted assets. 2%; State Street Corp. That could lead to the “systemically important” designation being removed as the financial company shrinks.
The surcharges are expected to come into force on 1 January 2019. On July 9, Fed Governor Lael Brainard said “it will be important to assess incorporating the risk-based capital surcharge in some form”, reinforcing the industry’s expectation it’ll happen.
The Financial Services Roundtable, an industry lobby, argued the US rules would leave the banks at a competitive disadvantage to foreign competitors enjoying lower capital requirements.
Under the final rule, the Fed will determine each bank’s riskiness by comparing it to a fixed baseline: Global statistics on the banking sector from 2012 and 2013. The Fed tweaked its formula to use an average euro-dollar exchange rate over a three-year period, as opposed to a spot rate.
Speaking at the Fed meeting, Governor Daniel Tarullo said that “it would not be sensible for us to disregard GE’s announced plan to reduce [General Electric Capital Corporation’s] size by 70 percent, particularly in light of the fact that it is demonstrably executing that plan”.
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Banks would have to meet the additional capital requirement with common equity, considered the most stable source of funding because shareholders can not withdraw their money in a panic. The new surcharge will begin being phased in at the beginning of 2016.
